In this week's Stansberry Investor Hour, Dan and Corey welcome Stephen Hester to the show. Stephen is an editor at our corporate affiliate Wide Moat Research.

Stephen kicks things off by breaking down the Federal Reserve, interest rates, bonds, and how all of them are intertwined. He also clears up some misconceptions that folks might have regarding the Fed and the markets. He follows up by explaining his strategy for investing in options. Contrary to what some might believe, Stephen says that it's important to know about a company before its options...

The main focus I have [is] on the underlying company – the option comes last. If the company is rock solid and I don't understand what the key risks are, then you're going to get a nasty surprise when you sell put options on something you don't understand and it backfires.

Next, Stephen warns about the temptation to sell premiums on trending companies. He says that successful trades might cause folks to focus on potential high gains rather than the fundamentals. Then he discusses the different methods of knowing where the yields for options ought to be. And he mentions the struggles that individual investors might have with finding good opportunities...

You can spend two minutes and find 100 interesting stock positions. I challenge you to find that in bonds. The bonds can be tough, especially individual bonds or ones that don't yield... Spending the time to find an individual bond that just pays kind of a normal amount. It's a waste of time... I try to have a... big opportunity set so I can try to find the most interesting, best risk, just returns for the customer.

Finally, Stephen shares one company that he's really interested in. It's a company that he has studied and researched in the past, and it remains a strong business. And Stephen mentions that one of the biggest things he hopes he can do for readers (apart from helping them find worthwhile companies to invest in) is to educate them. He says his goal is to help provide them with the tools to invest in the years to come...

Everything I do has a strong education component. I hope at least that's the most valuable thing I actually provide. Not that I don't want the investments to work out – you guys have heard how much work I put into it. But, yeah, teaching the person, I think, is the most important because that's going to help their decision-making, hopefully, the next 20, 30, 40 years.

Click on the image below to watch the video interview with Stephen right now. For the audio version, click "Listen" above.

(Additional past episodes are located here.)

This Week's Guest

Stephen Hester is an editor at our corporate affiliate Wide Moat Research. He started his career in the hedge-fund industry before moving on to large financial institutions. His latest role was as director of due diligence at two $200 billion-plus independent broker/dealer networks. In the past decade, he has presented institutional-quality analysis on commercial and residential real estate, tax-driven special situations, private equity, private debt, and traditional and renewable energy in more than 100 investment committees.

Stephen also authored publications on regulations, private and public company investment analysis, and advanced engineering applications. He has a bachelor's degree in economics and a master's degree in energy and earth resources from the University of Texas at Austin.

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 Stephen Hester, editor at our corporate affiliate, Wide Moat Research.

Dan Ferris:                 Stephen is awesome. He knows all about options trading for income and he knows all about high-yield securities, two great areas. I know a lot of people are concerned with income, as they should be, and this is the guy to talk to. And let's do that now. Let's talk with Stephen Hester. Let's do it right now.

                                    Stephen, welcome to the show. Glad you could be here.

Stephen Hester:           Thank you, Dan.

Dan Ferris:                 You bet. Corey and I are going to pepper you with some questions for a while here this morning. And let's start out, though, with the ultimate question for our listeners, who are saying, "Hmm, Stephen is a new guest. Haven't seen him before." Maybe you could just tell them a little bit about what you're doing now and how you got there, a little bit about your background?

Stephen Hester:           Yeah, happy to. It's been a fun adventure. As of right now, I manage two of the three back-end products for Wide Moat research. So, my partner Brad Thomas, he's definitely the figurehead. I go on camera every once in a while, so a few people have probably seen me, but he's definitely the star of the show. But I run an option service, not a speculative – in fact, I'd call it the opposite, believe it or not. We'll probably get into that maybe later. But yeah, I have an option service and then a high-yield service where I try my best to have the – you can have your cake and eat it, too. We know there's no real one of those. It's a matter of how far you can push in that direction.

                                    So, yeah, they're two interesting ways to get income that I think the average retail investor – and I think, understandably so – has some hesitancy around. And so, as much as I try to give them really good investing opportunities, it's also about teaching them. So, long after they're reading my stuff they'll still have those skills and that knowledge. And we've been at MarketWise in one form or another for probably four – going on maybe five years, so a little bit of time. Less than some other people on the podcast, but we've been here for a little bit. And prior than that – prior to that –

Corey McLaughlin:    Mostly Dan.

Stephen Hester:           Yeah, exactly. Yeah, Dan's – he's – we're talking multiples today. There would be the first multiple of the conversation.

Dan Ferris:                 Yeah.

Stephen Hester:           But both Brad and I wrote a lot on Seeking Alpha, and that's how we met. And I was a little guy compared to Brad, but as we'll probably also talk about a little bit today, I specialized in alternate investments – so real estate, private credit in the case of the public markets, business development companies. And then, also, because of my hedge-fund background and just most of my career, and still a little bit to this day, is on complex investment, due diligence. And so, that lets me take "What is this preferred or this little goofy thing that yields too good to be true? How do I understand what the risks are? How do I kind of peel back the layers of the onion and figure this out?" And my skill set, frankly, is better in that area. And so, I kind of apply that institutional skill set I developed over the past 20 years or so to help subscribers today in more abstract asset classes like interesting parts of high-yield, options, etc.

Dan Ferris:                 All right. That's cool. There's a lot going on here, which I love because I love tearing into complex situations.

Corey McLaughlin:    I have a question about one of these high-yield areas later, but we can get into some other stuff first. But yeah, for sure.

Dan Ferris:                 Yeah, we have – I have a question, just to start it from the top down a little bit here. I'll just – I'll phrase the question in the simplest, most primitive terms possible and, Stephen, you just go with it wherever it goes.

Stephen Hester:           Sure.

Dan Ferris:                 So, in the most primitive terms possible, real estate lending is a long-term proposition. Mortgage loans are a long-term proposition. Now, the Federal Reserve likes to manipulate the shorter end of the of the yield curve.

Stephen Hester:           They certainly do.

Dan Ferris:                 They certainly do. And sometimes, as we were talking just before we hit the record button, sometimes the longer end of the curve, 10 years and out, doesn't really like it very much, which is to say for our listeners' sake sometimes the Fed cuts rates on the short end and the longer term rates go up, not down. Presumably, this dynamic is important to a fellow in your niche.

Stephen Hester:           Yeah. So, first – I'll be the first to say that it is pretty hard for anyone to figure out how all these levers work. So, starting with a little bit of humility there. I try to focus on what I can determine is true. I definitely – I'm probably about as good as anyone in kind of predicting the future, etc. But even knowing that you don't know something is still very valuable. Maybe that means you go through a floating-rate option or something if you just don't know.

                                    But in terms of the interest rates in the Fed, it's kind of an interesting dynamic. So, the Federal Reserve does not have – I won't say power because that's probably not the right word for it. It doesn't have as direct influence over interest rates as people think. And it's not that they're really wrong or they didn't observe something correctly. It's that in many times in the past, when they have pulled their one lever, it's gone through the whole credit market. So, it certainly looks like it. They pulled the lever, they put interest rates to zero, and it worked throughout the whole yield curve, meaning five-year bonds, 10-year bonds, 30-year mortgages all went down. But they really only have control over the front curve because they're dealing with banks in a very particular way on kind of short-term credit.

                                    Interestingly, and I think we're literally seeing this today, is if you push interest rates low and that through ripple effect increases expectations for inflation, well, then a 10-year or 15-year obligation, they're going to price that higher because you're sitting over here like "Well, shoot. If inflation goes back up to peak, I'm only making 100 basis points spread – one point spread. That's not very economic. What's the point of that?" Well, I'm getting – inflation expectations are going up. The Federal Reserve is kind of throttling the early part of the interest rate kind of yield curve. And not to use – I'm not trying to use fancy language. Just think of the yield curve as just interest rates today on a six-month [certificate of deposit] versus a 10- or 20-. That's all that curve means. If they make it too cheap in the beginning, that absolutely – all things equal – causes inflation. And people who have long-term fixed rate debt, if you're buying it, it's going to make you more nervous about where inflation is going to be in five years or 10 years.

                                    And so, I think literally I saw new data today, Dan, on mortgage rates popping up a little. And I've got a home I'm trying to sell, and so I'm looking at it through two lenses here, from the investment one and "Great, interest rates are going up over there." So, it's definitely a challenge that – to just give one more point there from – you asked me about kind of an investment perspective. When you're looking at – let's use real estate investment trust ("REIT") – that's the publicly traded real estate vehicle for most people. It isn't as – I think as simple as you might think, including some of the CEOs of those firms, to do what we'll call the right approach because some of the best REITs stacked their – they made their debt pretty short term, which means it ruled over quickly and they got exposed to interest rates sooner.

                                    And now they're looking around and they're like, "Well, long-term debt isn't cheap either." And they're kind of stuck. So, at least you can look at the balance sheet of the company, and it’s not unique to REITs necessarily, but any long-term debt and just think "OK, is this actually a prudent move? What risk does this create for the firm?" And you can – it also helps you explain sometimes, especially with real estate, whenever rates do move unexpectedly, you'll often look at your portfolio and be like, "Man, what the heck is going on with this stock or that stock?" And oftentimes the answer lies in they structured their finances in a way hoping for this and it looks like we're actually going in the other direction. So, it can be pretty useful.

Dan Ferris:                 All right. I like the fact that you started off talking about humility and the inability to predict. That's – I just want our listeners to know that's how you know you're – that's one of the things that tells you you're talking to the right guy.

Stephen Hester:           Hopefully.

Dan Ferris:                 Yeah. Well, one of them. Don't worry. We've got more to talk about. Yeah. But it's really important because people can't predict that kind of stuff, and it's – the job becomes management and strategy and not prediction.

Stephen Hester:           That's right.

Dan Ferris:                 And I think too many investors – I hammer on this point, even though it may seem a little laborious because I know for a fact that a lot of investors, individuals who are managing their own accounts who aren't necessarily financial professionals, they get an idea about being able to predict things kind of stuck in their heads early on. I think a lot of people start out with that idea. So, I just – anytime I can disabuse people of that idea, I take the time to do it. It's that important to us, I think. So, let's talk about – let's go at one these buckets that you play in.

Stephen Hester:           Sure.

Dan Ferris:                 How about options? I love the fact that you said that these aren't speculative positions. And I assume you're selling options and selling spreads and things for income. And what are your – I'm really curious now because I do this all the time myself. I'm curious to know what your favorite strategies are and how you think about it from the top down and then how you go about it from the bottom up.

Stephen Hester:           Yeah, no, happy to. So, when I traded – it wasn't for long, but I traded for a few years, and I was right out of [the University of Texas at Austin] where – I still live in Austin and Mexico City, but I'm in Austin right now. And when I was here I was finishing up undergrad and was working at a hedge fund. And the reason I bring that up is because I was not very good at trading what the other guys traded. They were doing momentum. They were doing technicals, not in the way most people understand it but more like order flow analysis, using really advanced software. And they were pretty good at that but I was mediocre at best. I was better at risk management and better at doing due diligence. No surprise at this point, whatever, 15, 20 years later.

                                    What I found was that illiquid securities have a structural benefit, meaning if you play it correctly, illiquid securities can benefit people who understand them well. And the flip side is true, too. If you don't know what you're doing, illiquid securities charge you a tax. Well, I love collecting that text. And it takes a lot of strategy. It takes some experience for sure. But options compared to equities at least, one of the benefits for me is they're illiquid. And what that means is it's not unusual at all that – I like selling put options, to answer one of your questions directly. Well, on a put option the – let's say it's a given contract, it doesn't really matter, and maybe the premium is $3. And then some news comes out, the market moves a little, it's not unusual at all for that premium to go to $5. Well, that's a dramatic increase: 75%, whatever increase. Pretty remarkable.

                                    In the equity markets, that's – that doesn't having very often. You have to go really aggressive in a crypto or something with leverage or whatever. And the point being is if you're patient – like, on my back-end service, we do one trade a month. So, I have a kind of a big framework that as it's getting close to when I want to make that publication, it's narrowing down the opportunity set. And typically, we'll say, "Oh, wow, this is interesting. I have tools that I use and the premium is currently 50% more than it should be, all things equal." And if you guys want to go through what that means practically speaking, I can do that. So, not only is the put option attractive, but since it's illiquid the price moves very quickly. And if you're using limit orders and you're very disciplined, other people's aggressive behavior or knee-jerk reactions actually transfer money into your account, without not a lot of stuff in between. It really does work.

                                    And the other component that I think is important is that when you're selling put options on quality companies that you want to own – and that's a very important statement. If you remove any of those pieces, it doesn't work. But if it's high quality and it's on stock you want to own, then you're actually selling insurance, is what you're really doing. And you're collecting those premiums. And sometimes an event happens and you have to pay in the sense you have to buy the stock. And that's OK as long as it's a good asset. But the return profile, both for me individually and for the service, is very much actually like selling insurance where you're being careful on what you underwrite. You're not selling insurance on anything. There's probably some teenager with a new Mustang out there. Are you going to sell them insurance for $10 a month? Well, it sounds laughable. That's crazy. Well, what if it was $2,000 a month? OK, well, I don't know. Even though those numbers are vague, we instinctively realize "Oh, wait a second. That actually sounds interesting."

                                    So, a lot of what I do behind the scenes is I run the math and do a lot of fundamental analysis, is actually the main focus I have, on the underlying company, not on – the option kind of comes last, because if the company isn't rock solid and I don't understand what the key risks are, then you're going to get a nasty surprise when you sell a put option on something you don't understand and it backfires. Because – we can talk about it, but that will happen a lot if you're not careful actually. So, that's it in a nutshell, but that's my favorite strategy and kind of why it works.

Dan Ferris:                 So, selling puts on really high quality companies. Mostly in the real estate sector? Or just no? Or just –?

Stephen Hester:           Yeah, not mostly in the real estate sector. Probably less than 10%.

Dan Ferris:                 OK.

Stephen Hester:           Yeah, it's pretty sector-agnostic. I have done it definitely on a few REITs, but yeah, there's certain reasons why REIT premiums generally aren't as good as some other industries. But yeah, I go where the market tells me. I did a lot – a decent amount of AI-related companies, which normally wouldn't fit my profile, but some of them got very cash rich and their growth rates were so high I got comfortable with them and actually had some of our – and this isn't a sales thing – it's more of an indication of how the market works. But it ended up being some of our best trades because the volatility around some of those names was so high that the risk adjusted made sense. That volatility can help.

Dan Ferris:                 Right. And –

Corey McLaughlin:    And Steve, if you sell put – if you do it like you're saying consistently, you can do it consistently over time, right? When people are seeking income, this is something you can do over and over and over again, right?

Stephen Hester:           This is – yeah, that's a good question, Corey, because, yeah, I do them once a month and people might think "Well, yeah, but he works very hard. It's his job to find the trade. Is it realistic for me?" And you probably won't maybe find the best trade all the time, but I think a pretty practical way for listeners who are – they're in the mix, they're in the market, and they probably have maybe a watch list. I think a lot of people have that. Maybe it's 10 or 15 companies. Some of them are new and some of them are maybe – like for me with Caterpillar, for example, I've sold puts and invested in Caterpillar I don't know how many times, dozens of times, and I have almost a 100% win rate. And that's mostly luck, by the way, but it's just worked out well.

                                    So, that's on my little list that I'm kind of looking at. And once a stock kind of comes down to where you almost want to buy it, that's a really good indication that you may want to sell a put option on it, because you're going to get – let's say it's Caterpillar at $200, which is the old days, but say it's Caterpillar at $200. And you're like "Man, I would really like to buy it between $180 and $190. I'm disciplined. I'm going to be patient." Well, one option you can do, no pun intended, is sell a $200 strike co-option, collect a good premium. Maybe it's $15. It wouldn't be unusual in that circumstance. And then there are only two options here. You're either going to own the stock at $200 but at a lower cost basis because you collected that nice premium, about $15 a share in this hypothetical, or you don't and you just collect the premium. Those are the only two possible outcomes.

                                    Now, that doesn't mean that Caterpillar can't go to $150. It doesn't – that could definitely happen. There's of course risk. However, psychologically, I like to think in probability terms. If you were going to buy it anyways at $185, then you were going to buy it anyways at $185. Whether you sold a put option or not is irrelevant. It doesn't make me sense, even if emotionally it's a little painful when it goes down. So, that's a really good way – when I have colleagues and stuff that are asking kind of how to get into it, a great way is what's your favorite low-dollar stock? That way the capital commitment is low. And let's say Ford is cheap. Ford was beaten up for years. It would go down to $10 a share and rebound. And I'd say, "Well, if you're thinking about buying some Ford –" the premiums, by the way, on Ford were excellent for a long time. It's kind of recovered now. But for years the premiums were pretty elevated, and that was a great way for a minimum amount of capital that you could sell that option. Typically, what would happen is you could get – just to give a concrete example of why you might do this, you could collect potentially maybe one, one and a half years of Ford's dividend, which is a pretty significant dividend, in maybe 60 days. Well, if you're an income investor, this makes sense as long as you do it correctly. You've got to be safe about it.

Dan Ferris:                 Right. That's awesome. Yeah. Yeah. That's a great way –

Corey McLaughlin:    Yeah, I love that. That's great advice.

Dan Ferris:                 That's a good perspective on it. Yeah.

Corey McLaughlin:    Yeah. Because it takes the – that strategy, if you almost want to buy the stock, it's a great time to sell a put option. That's – it's a great way to think of it because it just takes the psychology – it's like a psychological cheat. It's like you just take the decision-making out of it. You let the market decide for you. I guess it's – there's always that "Aha!" moment when those sort – when you – what you're describing to me is like when that – when some decision can be made for you that just benefits you both ways, it's refreshing. So, yeah.

Stephen Hester:           Yeah, it's a good point. And it –

Corey McLaughlin:    Glad you described it that way. Yeah.

Stephen Hester:           It helps you avoid what I really, really hype on and the reason, again, I like examples in my – let's say it's an eight-page analysis that I send out to subscribers. Seven of those are on the fundamentals of the company, not on how much money you're going to make theoretically on the option, because you don't need to know anything about the option if it works correctly. You're just going to get money the day you sell the contract. And then two months later, you're going to think you're a genius or whatever.

                                    But that is not how it always works. And so, the way you described it, Corey, I think is so valuable, is because the temptation to sell a super-rich premium on a GameStop or whatever, it won't happen, because you know that your style is maybe not to do that and instead you stick to companies you already know. And I think that's the major risk factor doing this, because it's tempting. We have to be honest about that. If you sell put options on a couple of good companies and you look up one in the news that's being sued or some horrendous problem this happening, and yeah, the put premium will be high, but it will be high for a reason.

Dan Ferris:                 Yeah, it falls – that falls under the general category of chasing yield. And I was talking about, too, the framing – the option income in terms of the dividend yield is – it's something option traders do that our listeners might not have known. I'll just put it that way.

Stephen Hester:           Yeah.

Dan Ferris:                 So, you were talking about how – about the premium being where it ought to be before, and I wanted to get back to that, about the premium being at the level where it ought to be at a given time. Maybe it's much higher than it ought to be. And you said, "Well, we can talk about that later."

Stephen Hester:           Yeah.

Dan Ferris:                 How do we know what ought to be? How do we know what it ought to be?

Stephen Hester:           So, there's – I'll boil it down to kind of two factors. One is relative to other stuff. So, that's one metric. So, let's say it's Ford. If we stick with that example, GM financially is actually not that far off Ford in many ways. Neither of them are A-plus-rated, etc. They have pretty similar exposures. They make most of their money off trucks and SUVs. We can go on. So, you can look around premiums and that's the simple marketer comp looking around. And the second one is relative to the company's fundamentals.

                                    And one of the most important aspects of that is I personally – and I don't always succeed in this, but I personally try to find really attractive opportunities as if you think of – think of a stock price that's moving. But instead of looking at the stock price, it's a chart of the valuation. And it varies by company. It's not always this simple, but for a standard company, it's a C corp, you can do it off net income. Usually that still requires a little massaging because of [mergers and acquisitions] and it's – earnings is an accounting number more than a financial number. So, some companies it's one and the same. The earnings is just how much money the company made. It's that simple. Other times it's not.

                                    But on companies that are steady, which long-term dividend-paying companies generally are almost by definition, their earnings are reflective of what the company is doing. So, that's an important caveat. But whatever the earnings ratio is, if you look at it as a chart, it's going up and down. If it's in the bottom 10% of where it normally historically trades and it doesn't have some cataclysmic problems, that gets my attention. And by definition, 10% of the time it's going to trade down there. It doesn't necessarily mean things are wrong. Sometimes it does.

                                    If your put contract, if the strike price is call it the bottom quarter of the valuation of the firm, you're probably going to be OK. Even if you put the stock, the company's high quality, you paid a reasonable price, you're probably going to be OK. I assume every put option will be put to stock. In fact, I actually welcome it because the returns should be better, actually. If we really did find an undervalued gem, it usually will work out even better over time. So, it's the valuation relative to what price you would own it, just like buying the stock. We look at it the same way.

                                    And then, really looking at the risks, really spending time looking at the risks facing the company, because the probability that it's trading that cheap and there isn't some kind of problems going on, at least in the industry where the company is low. And so, a lot of my time, probably over 50%, is just going through those risks and trying to get a good understanding. And the market is – I think it's rarely wrong long term. And who am I to say, frankly, the market's right or wrong, but just based on where their stock goes. But it's really – it's wrong all the time in the short term, which makes investing difficult if you focus only in the short term. And so, there's tons of cases where an earnings miss happens and then you read through it and they raise guidance. So, they're actually anticipating better results over the next 12 months. But a slight miss causes every Wall Street analyst to hit a massive sell order, the stock drops 10%, the put option premium goes up. Assuming it was that simple, that could be a good setup when I'm talking about kind of analyzing the fundamentals.

Dan Ferris:                 It fascinates me. I think it's really important to note that you talk like a long-term stock buyer. You talk like a long – a guy who's buying stocks and holding them for the long term. But you're doing that analysis and you're taking these shorter-term, much shorter-term option positions. And you're talking – like you said, seven of the eight pages is the fundamentals of the company as though you view, you're viewing the stock as ownership in the company. You're not just trying to flip a trade for some technical reason or something. That is – to me, that's really cool because I've made my living for 25 years – Porter hired me 25 – in September of 2000. We were talking about how long people have been around the company. And that whole time all I've done is pick stocks. I haven't done any options trading in – not in a newsletter, but I've done it in my own account. And it's the – it's almost the identical process of assessing the value of the company and assessing the fundamentals of the company and assessing the risk in the sort of detailed manner that you say. But – except one little difference. I want to hold the stock for 10 years. You want to trade an option for two months. That's fascinating to me.

Stephen Hester:           Yeah, it's interesting. And this kind of – it aligns with a core thesis I have, which whether you're even doing hedge-fund due diligence like I – or private equity or these things that all seem very different from each other, very abstract, for me, at least, even if it's a short-term options trade or a 10-year hold on a really good tech play or whatever, the actual underwriting to me shouldn't change a ton, because the truth is, if we're being very honest, nobody predicts the Great Recession very well. And even if they did, they don't know how it's going to happen exactly. It's just too many human – random human events that are going to be involved.

                                    So, the point is if I can do a reasonably good job of protecting the downside by looking very closely at it, then in the event which it's going to happen – we've definitely been put stocks and the win rate's pretty good on those, not every one but pretty good – then I'll be minimizing losses where instead of a 50% loss maybe it's 5% or 10% because they've missed earnings and it's like, "You know what? This company doesn't earn my money anymore. The fundamentals that we reviewed, it's – the trajectory is not very good anymore."

                                    And then if there is a crash, which is always coming – we don't know which sector... We don't know how it's going to work exactly – you want to be in a company you understand well that you can either make a decision, "Hey, it's time to jump ship and go move our, allocate our capital somewhere else" or "Hey, I'm not going to panic on a drawdown." That's – we're all susceptible to that. And the more retail-focused you are, I think that – it's just human nature tends to override it. And the more confident you are and what you own, the less susceptible you will be to a panic move that you regret. Look at COVID-19. That's probably the most extreme example.

Dan Ferris:                 Right. That's right.

Stephen Hester:           But yeah, you just – that helps me and my newsletter customers because they're like, "You know what? I know this company. I'm not terrified. I'm not going to sell just because the stock is –" most of the time that's – it's just market volatility.

Dan Ferris:                 Yep. Yeah, that – people wonder how do you know that you want to – the stock's down 20% or 25%. How do you know to keep hanging on to it? "Well, remember that eight to 10 pages of stuff I sent you two months ago? It's all that."

Corey McLaughlin:    That hasn't changed. Yeah.

Stephen Hester:           And if it has, that's OK, too. We'll acknowledge that and we can move on. But yeah, this is kind of a funny way to look at it, but I think it can help people psychologically. Pull up whatever company you want. The chart goes like this. Nvidia, whatever you want. It may be more like this than this, but you get the idea. There's huge pullbacks. And the truth is most of the time if you did some valuation work, that can help you get in the right range kind of on the chart, so to speak. But overall, did the company's outcomes change massively as the chart – no, not really. Probably not. And yet, if someone had bad luck and bought at one of those little peaks, they're depressed when it goes down. And if someone got a little lucky and bought at the bottom of one of the troughs, they feel like a genius. Well, the decision-making is the same. It's roughly the same. And yes, we can add some alpha, so to speak, by being very disciplined, like when we buy. But overall, if company stocks just went like this or maybe like Visa – for years Visa just kind of went like this – OK, fine. But there's a reason I said Visa. There aren't really any others. Pretty much every one is very volatile. And it doesn't mean you're wrong just because you didn't time it perfect.

Dan Ferris:                 Right. And perfect timing, let's face it, it's mostly luck anyway.

Stephen Hester:           A hundred percent.

Dan Ferris:                 Nobody has it.

Stephen Hester:           Yep.

Dan Ferris:                 Like we said at the beginning, you need a dose of humility when you do all that. You can't predict anything. But you can do – the point is, though, you can't predict anything but you can do the fundamental work. You can absolutely learn to identify what is a really great business and what is not. And once you get the basics of that, they tend to hit you over the head. They call themselves out to you when you're looking at the fundamental – when you're looking at the business and when you're reading the filings and when you're looking at the financials, it's like, "OK, consistent margins, gushing cash, great balance sheet, raised the dividend every year for 50 years or something." Whatever it is. Whatever it is.

Stephen Hester:           Something's working.

Dan Ferris:                 Yeah. All right. So, let's – I want to talk about high yield now.

Stephen Hester:           Sure.

Dan Ferris:                 Because we had Harley Bassman on the show and he seamlessly talks about bonds and options. It's all a flow for him. So, it doesn't surprise me at all that you're the high-yield guy and you're the options guy. Maybe – actually, maybe that's a place to start. I hadn't planned on doing this, but what is – what – why is that? Why did the bond guys know options so well? They all seem to.

Stephen Hester:           Well, I don't – I haven't experienced that too much personally, but you would have a better view, Dan, than me –

Dan Ferris:                 Oh, OK.

Stephen Hester:           – from your seat.

Dan Ferris:                 All right.

Stephen Hester:           But it does make some sense where – you guys tell me. But I would say that really you could – if we dump all credit into a bucket, even though it's very, very different, it's in the same bucket, isn't it? In most people's mind it's all the same. It's not interesting. It's almost too complicated by how simple it is where someone just sees a yield and they go, "I don't understand how this works. If the company does well, what happens if it does poorly?" Well, nothing. "But what if it does really poorly?" Oh, you lose all your money. That's kind of how it works in a nutshell.

                                    So, I think they're both considered kind of abstract. And they both require – I think you could argue this at least. It takes a lot of due diligence just to find an opportunity. Equity is not like [crosstalk] at all. You can spend two minutes and find a hundred interesting stock positions. I challenge you to find that in bonds. Bonds can be tough, especially individual bonds or ones that don't yield 4% and just don't make sense for anyone. Just the truth is spending the time to find an individual bond that just pays kind of a "normal" amount, it's a waste of time. It's not very interesting. And yet, the bond – the fixed income market's also a little illiquid. Things are not priced properly all the time. Some things are really priced well, but if you go into kind of the bottom of investment grade – so, think of quality companies and you're at the bottom. So, they're still a quality company but you're at the bottom. And if you go much lower, now it's questionable whether you're a quality company.

                                    That area is not very effective. And the bottom prices are pretty volatile, especially whenever there's a little bit of a crisis. And we've had a great investment opportunity the past few years where we had that regional banking crisis, the Silicon Valley component. Any recession, and it causes, again, not the highest rated bonds, but the ones kind of in the middle and below to become very volatile and you get some great opportunities. Yeah, but for me, high-yield – and I probably don't define it like most people, is I'm including preferreds. I'm including bonds, not Treasuries or anything, generally speaking, but whatever, maybe bonds that yield more like a six to nine yield to maturity. So, that just means including capital gains to maturity. And then even some equities, believe it or not. So, business development. Business development companies.

Dan Ferris:                 Right. [Business development companies ("BDCs")]. That's one I was thinking of. And REITs, [master limited partnerships], maybe? Or no?

Stephen Hester:           Yeah, kind of – it's pretty subjective, frankly. I definitely don't have a perfect definition. But yeah, if the yield hits kind of a benchmark, the total return kind of hits at benchmark and the risk is acceptable, then I kind of will include it. And the reason is – the way that I look at it is I'm – I was blessed to have a reasonably good understanding of these different asset classes that most people don't because I did it for my career for so long. So, that means I try to look at all of them. I try to have a big – responsible but a big opportunity set so I can try to find the most interesting, best risk-adjusted returns for the customer. That's how I look at it.

Dan Ferris:                 OK, that – yeah, that makes sense to me. That makes sense.

Corey McLaughlin:    Let's face it, it takes some more work to do the bonds and the – and options.

Stephen Hester:           Thank goodness I enjoy it because it does. Yeah, most of them result in nothing. So, most of them I just spend hours and then at the end I'm like "Eh, this isn't as good as I thought it was, and so be it." You just move on to the next one.

Dan Ferris:                 Yeah, the bond option guys I know are all like you and Harley. It's like deep digging, scouring the market for opportunities that nobody else seems to be able to find. Or most people can't find them. That makes a lot of sense. But also, there's a math component in there, too.

Stephen Hester:           Right.

Dan Ferris:                 Very, very good math people are doing both thing, it seems like. Anyway. This is a fetish of mine. I'll get off of it. But do you have – I feel like we need a concrete example. Do you have a name, like an equity or anything or even just a company whose bonds you like right now that you can talk about? I know you have subscribers and they probably don't want you giving away their latest, greatest stuff. But is there a concrete example that we can use that kind of highlights your style and why it works for you?

Stephen Hester:           Yeah, I can use some. So, Brookfield is – I think it's the second largest alternative investment manager. So, what that means in simple speak is you have maybe a BlackRock and you have these other firms that really focus in [exchange-traded funds ("ETFs")] and mutual funds. Vanguard, for example. They don't do a ton of alternative investments. That's more of like a Blackstone. Blackstone has the biggest real estate portfolio in the world. Stuff like that.

Dan Ferris:                 I was going to say Macquarie, but Blackstone, yeah.

Stephen Hester:           Yeah, they do a ton of consulting, Macquarie does, too. Blackstone, they're like strictly alternative investments. And Brookfield, I think, is the second largest. They're actually a Canadian firm. And so, they're pretty similar to Blackstone. They just have a little bit different approach. They're actually more heavy in infrastructure. That's kind of what they're known for us. I think they're the world's largest owner of infrastructure. Think of dams, maybe hydroelectric facilities. Those kind of go in two categories. But they're like the largest infrastructure owner.

                                    Well, Brookfield, I don't know if it really helps the company. Those guys are probably way brighter than me, so I'm going to assume it does. But one of the things that they do is they financially engineer the heck out of their business. There's Brookfield Asset Management. There's like – I could probably list 10 of them off top of my head. Well, each one of those entities ends up having its own capital structure in a way – meaning their own debt, equity, etc. – in a way that Brookfield thinks is optimal. A lot of firms don't do that. They just have one company and they want the lowest cost of capital, so they do – it's almost like if you have a teenage son and you're like, "You know what? Actually, I'm going to make you get the loan because at least it's lower liability on me. But your interest rate's going to be double." A lot of people, their parents are like, "Nah, I'm paying for this anyways. I'm just going to consolidate it under me." It's a little bit like that.

                                    The difference is that in Brookfield, most of the bonds do have a parental guarantee. It's not the easiest to find. It's not always – it's actually pretty difficult to find, but – not all of them, but most of them do. And because Brookfield is trying to optimize everything so much, they have entities in Bermuda. They have entities in the Cayman Islands. They'll have a bond issuance in Canada. The same company has bond issuance somewhere else. And those have no research. There's nothing out there. No coverage. And many of them are actually tradable bonds, meaning they have a ticker. They're like baby bonds, is kind of what people call them. So, again, the financial engineering part, at least this one helps us. They make it where you can just trade it like your Fidelity account.

                                    Well, these bonds are often very long term because they match the infrastructure. So, it's an entity that has a bunch of infrastructure, and the lifespan of the infrastructure is whatever, 30 or 40 years. So, they issue these bonds. Well, because nobody understands most of what I just said – practically speaking, it sounds like gibberish, right?

Dan Ferris:                 Yeah, it does.

Stephen Hester:           Yeah, because it kind of is. And what Brookfield does is so unusual. People just don't put these pieces together. And it's almost like why doesn't Brookfield make this more evident? It would help them.

                                    But to give you an example of what happened, is they issued some of these bonds on some of their infrastructure. Again, if you put Brookfield into a – whatever your search bar is on any financial services website, you'll actually see a bunch of bonds pop up and you can go explore those. And a lot of them had current yields between five and five and a half. So – not current. That's the wrong word for it. At par value. So, when they issued the bonds maybe they paid five and a quarter. Whoop-de-doo. OK, fine. That's not bad. But whoop-de-doo.

                                    Well, many of those, particularly when I recommended them to our subscribers, and they're only a little bit above where that is now, they traded at, like, 70 cents on the dollar, 65 cents on the dollar.

Dan Ferris:                 Now you're talking.

Stephen Hester:           Now you're talking. Right. Now you can do a little arithmetic and you go, "Wait a second. That five now starts with a seven." But it's actually much better than that. That's the immediate kind of gratification is "Wait a second. I would buy – now that I understand it, Steve and Dan and Corey helped explain it to me that actually Brookfield is a guarantor all the way down, a seven handle, 7% yield on this bond is super great." It is great, but it's much, much better in the sense that if interest rates almost win – we'll say "if" – interest rates over the next five, 10 years, whatever do come down a little, that bond is not going to trade at 70 cents or 65 cents on the dollar anymore. Now, I'm not saying it'll go to par necessarily, but it'll probably go to 80, maybe 85. So, that 7% yield may not even be the biggest return component. It may actually be the capital gains.

                                    And so, that's a really interesting setup where it's not obvious when you see this bond and you see the price and you're thinking "This Bermuda bond, what the heck is this thing?" But I love solving those puzzles and putting the pieces together. And eventually, in my opinion, what will happen is it will trade back to par and then everyone will say how obvious it was. "Oh, yeah, I can't believe everyone didn't buy these. Didn't you know they're backed by Brookfield and...?" But since they're so discounted, I think it makes people even more suspicious, when that's really a discount just due to interest rates. It's nothing to do with Brookfield or the infrastructure. It's what we talked about at the very beginning, is that they're just trying to discount things and make it work for inflation. But I'll tell you, if you just own that and it just pays you 7% to the bond matures, which by the way, it has to go to par when the bond matures anyways, but that's not a terrible setup.

Dan Ferris:                 Yeah. Yeah. That's – it's – you've just described one of the beauties of high yield. You get a nice capital gain plus a great yield. You get paid. I remember – I'm trying to think. I knew Brookfield. I knew Brookfield way back when before it was an asset manager. I've recommended too many stocks in Extreme Value since 2002, so I probably can't find it here in the list. But I know I kind of. I covered it at least once when it was BAM: Brookfield Asset Management.

Stephen Hester:           Yeah, before it went to BN and the different ones now. Yeah.

Dan Ferris:                 Right. And then – but I knew it before it was BAM, even, when it was – before it was Brookfield Asset Management. Anyway, what they've done, though – you're right. If you go to – if our listeners just go to Yahoo Finance or whatever, Google, whatever it likes, just type the word "Brookfield" and 10 tickers come up.

Stephen Hester:           It's overwhelming. Yeah, it's like – I don't – and the funniest part to me is that they – and again, I'm grateful for this. They made a lot of them baby bonds, so you can actually go buy them in $20 – literally $20 increments if you want, which is extraordinary.

Dan Ferris:                 Yep, like preferred stock or something. Yeah.

Stephen Hester:           Great. And you tend to get less slippage too when you buy the bond. They're not as illiquid. You put the limit order and it works great. So, it's clearly retail-focused. But nobody knows about them. They're too complicated. I mean, Brookfield Infrastructure Partners – that's one you've probably seen, Dan. BIP. They're the biggest infrastructure owners, individual entity. And they have four different bonds from four different countries. And it's all the same parent. But who's going to figure – I mean, really, who's going to figure that out? They're going to see a 7% yield and, again, totally justified, probably say, "Eh, too good to be true. I'm missing something here. I'm going to go on to something else."

Dan Ferris:                 Right. Yeah. Have you ever met Bruce Flatt from Brookfield?

Stephen Hester:           I don't think so.

Dan Ferris:                 Yeah, I met him a couple of times years and years ago, like at Grant's conferences and stuff. And I thought "Here's this guy running this massive thing," and I just walked right up to start talking to him for 10 or 15 minutes. He's the most down-to-earth – well, he's Canadian, so he's polite as hell.

Stephen Hester:           Real friendly, yeah.

Corey McLaughlin:    There we go. Yeah.

Dan Ferris:                 But – and approachable. But yeah, I just thought, "God, this guy is like –" I'm looking around the room. He's like the bloody genius – I don't mean this in a derogatory way, but the paperhanging genius of Canadian markets and here he is. He just seemed like the most down to earth guy and I'm like, "God, they're running this giant, complex thing." It's – when you read their filings and you get into all this, it's not easy to work it all out, is it?

Stephen Hester:           Not even close. No, the Brookfield one, whenever I've done – everything I do has a strong education component. I think that's the – I hope at least that's the most valuable thing I actually provide. Not that I don't want the investments to work out. You guys have heard how much work I put into them. But teaching a person, I think, is the most important because that's going to help their decision-making hopefully the next 20, 30, 40 years. But I –

Dan Ferris:                 The thing is –

Stephen Hester:           Oh, go ahead, Dan.

Dan Ferris:                 I'm sorry, I just – it just – what our – this is for our listeners' sake here, Stephen. Nobody thinks about just identifying the equity pieces and the debt pieces. You just – and then ownership stakes in all of the other tickers and stuff. And just working out the capital structure and those ownership stakes is like – that's real work for a company like Brookfield. Anyway, I'm sorry. I interrupted you, but –

Stephen Hester:           No, no, you're good. It was actually really – what I was going to mention is that I've done some strictly educational pieces occasionally just as a kind of a freebie for the – for our hardworking newsletter subscribers and I've often used Brookfield to explain the concept you just mentioned, Dan, about, "OK, well Brookfield –" this – I'll keep it simple but still effective. Brookfield entity one has equity preferred and debt, which is the best. Well, Dan, there's no best. Not really. But if you walk through the pros and cons of them, you can often find that it would – I think you mentioned this before, Corey – it'll jump out to you as, "This is the best for me because my priority is maybe capital preservation and maximizing my yield. So, actually, why the heck would I ever do the equity if I can get the preferred that pays the same, maybe even more. Or the bonds."

                                    And on the BDC subject, Dan, in the High Yield Advisor we still have, they're almost back to par now, so they won't be in there for much longer. I think they mature next year. But we bought some bonds during whatever that crisis was, maybe two to three years ago when the high-yield sold off. We picked up yield and maturity bonds on investment grade BDCs for seven to eight. Seven to eight, eight and change. Some of them were eight and change. And then the equity, it yielded higher. Do not get me wrong. It was yielding kind of normal BDC, 10 to 11. But to me, risk adjusted for the average person, an eight and a half on investment credit where it's never going to change – realistically, it's not going to change and your portfolio is just going to go like this through 2026, versus BDCs, which are very volatile, they're primarily retail investor-owned. I laid it out and of course these are just suggestions for people, but I was like, "This doesn't happen often." When the bond gets this close to the equity, I try to take notice because often it's a great opportunity and then they'll correct. Pretty soon it'll go back, like, "Oh, I'm not interested in the debt anymore because the yield's five." It's like "Well, yeah, now you're not of course. It's too far off the common equity."

Dan Ferris:                 Right.

Corey McLaughlin:    I know you're talking bonds mostly here, but I'm going to briefly try to take this into one thing you mentioned before, the highly leveraged crypto. Right?

Stephen Hester:           OK.

Corey McLaughlin:    There's these high – there's these super high-yielding products out there now, like 30% yields and whatnot. And you talk about your hedge fund – or, yeah, your hedge fund is and kind of examining all these – where does the yield come from? What do you make of not necessarily like a micro strategy, but there's all – there's a whole – there's dozens of them now. What do you make – what should people look out for when they see these double digit yields and things like that?

Stephen Hester:           Yeah, well, it actually – it's funny as a reminder because I saw those – a couple news articles pop up on those exact funds you're talking about, Corey, and I have not dug into them very deeply. So, I won't pretend like I have. But I can talk in generalities that will probably just lead us to the same conclusion. The reason that I spend all that time on that Brookfield, weeks maybe, trying to figure it out is because if you don't understand where the number comes from, whether it's a 7% or 8% or whether it's a 30%, there's a good chance it's not going to work out for you. You just – there's too many things going on that you're not aware of, kind of by definition, that can cause you problems. And when you don't know what you're doing – and this applies to me as much as it applies to anyone. When that thing that you paid $1,000 for goes to $700, then $600, your pain is going to go up and you're going to hit a breaking point and you're going to sell. You're not going to sell near the bottom. It'll probably be like the print. It'll be right at the bottom, perfectly timed, because you and other guys are all in the same boat, because you don't really know what's happening. All you know is it's supposed to go up and it's going down.

                                    So, anything with a double digit yield is a – that's definitely a shortcut. Anything with a double-digit yield you should look at very closely. And I've recommended stuff with 10 to 11% yields. It doesn't mean that there's a – it's a terrible investment or anything. But you've got to look at it very, very carefully. And then I do think it's safe to say there are certain sectors – crypto is probably the easiest one to kind of not attack here but highlight – where it's very retail-focused. People are getting a lot of money when they make up some goofy idea. They come out with a new fund. You mentioned there's, like, 15 of them. There's not 15 of them because there's $200,000 in each one. It's probably because there's $10 million or $20 million in each one. And these guys, if they can come up with a strategy to make a lot of fee income off you, they will. They don't have any responsibility to make you do a test that you understand their offering. There is in the private world, by the way. In the private world there's a lot of paperwork and there's some restrictions. But when it comes to stocks, for better or worse you can buy whatever you want. So, I definitely recommend trading very cautiously. And if you can't explain to your spouse or good friend how that 30% yield comes from, that's a good warning sign.

Dan Ferris:                 Yeah. "Goofy" is a polite way of saying "crazy bullshit," I think. And so – because I don't – I thought "Oh, Steve is going to tell me where the yield comes from," because Corey was framing his question that way. And I was like "OK, OK, he doesn't know either." Nobody – I can't get anybody to tell me what is the real true source of those yields. It's – and that could be a shortcoming of mine. I don't say that it isn't, but I think it's interesting that we can identify the source of yields in preferreds and equities and high-yield bonds and we can't identify the crypto.

Stephen Hester:           Yeah, well, I'll tell you, too, that, again, being totally transparent does not necessarily apply to those. It probably does, Corey, to the ones you asked about in crypto. But I don't know for sure, is that the number one way is return on capital. So, there's a lot of high-yield plays I've had people send me over the years that yield may be close to 20 and a lot of it is return to capital. So, you put in $100 – they're literally sending you back one or two dollars a month on top of whatever it earned. And they're allowed to do that, by the way. They just have to disclose it. So, you can guess where the stock price is probably going to go if they're just literally giving you your money back as a yield. And then, the second most common is derivatives. So, they're using derivatives, taking on one type of risk or another or maybe multiple. And then that's the other way they're kind of engineering the high yield. And both of those work out the same way your gut instinct is telling you right now, usually.

Dan Ferris:                 Yeah. All right. This is a good place to ask our final question. Our final question is the same question for every guest, no matter what the topic, even if it's a nonfinancial topic. If you've already said the answer to it, feel free to repeat it. But the financial question is for our listeners' sake: If you could leave them with one takeaway or one thought today – and like I said, if you've already said it, that's cool. You can just repeat it – one thought, one takeaway today, what would you like it to be?

Stephen Hester:           Well, I'll give them maybe a little challenge. Maybe a little growth opportunity. I would say that odds are one of the topics that we've talked about today is a little newer to them. And I would say my suggestion would be to go research one of these areas and just kind of learn as much as you can about it. And maybe from – you can go back in the podcast and hopefully I've given you maybe a few things kind of what to look for. But I would just encourage you to go explore these different parts of high yield, maybe explore options for the first time. Not even necessarily risk any money, but just go explore them, because the truth is a long time ago I didn't know about any of these sectors. And I started as a teenager, like 14, 15, investing in little stocks. And I wish I held my $200 in Apple, and I didn't. I sold like a chump. I doubled the money 20 years ago or whatever. But the point is you can find people that will help guide you as you get more into it. That's' – I also had great teachers as a due diligence officer for many years. But that would be my suggestion, is go find one of these that sounds interesting to you, put some time and energy into it. And then who knows, maybe that really helps your portfolio and your investing long term.

Dan Ferris:                 Nicely said. Thank you for that. And thanks for being here, man. It was really great to talk with you.

Stephen Hester:           Yeah, greatly appreciate the invite. You guys had great questions. And if you want to have me back, happy to help.

Dan Ferris:                 Oh, yeah, I'm already thinking of questions for having you back. We will talk –

Stephen Hester:           Excellent. I'll look forward to it.

Dan Ferris:                 Yeah. Yeah. All right. Thanks a lot, man.

Stephen Hester:           You're very welcome.

Dan Ferris:                 Hey, I like that guy. I like me some options and I like me some high yield. That was cool. I could have done another two hours of that, really, honestly. It was great.

Corey McLaughlin:    Yeah, you definitely could, just exploring income generation, which is on the mind of a lot of people now within the last five years specifically. I'm thinking of just inflation and people trying to keep up with higher prices and everything. And we have similar products in terms of the put selling at Stansberry. For a reason. It's something – if you know what you're doing and you do it on stocks that you are comfortable owning in the long term, like we were talking about, it's kind – if you're looking for income, it's kind of a no-brainer to do it, I mean, if you have enough capital to put to work. So, yeah, and then high-yield opportunities. Yeah, it's really that – like you were saying, that math calculus about finding what's being overlooked here in the market and who's – and a lot of times it's on the – just stuff that most people aren't looking at. And that's where the – that's where you find the opportunity if you just do some work if you have the time to do it, which not everybody does. And then you find go find someone like Stephen who can do it for you. So...

Dan Ferris:                 Yeah. And you mentioned people who are concerned with income. I would go back farther than the last few years. I would go back to taking – the Fed taking interest rates to zero and everybody going "I can't own bonds anymore. Now what the hell do I do?" And the answer is absolutely options, selling options. And we had another guest on the show, Mike Green, who their corporate mission seems to be very close to taking all the complex options strategies out of big institutions and offering them in the form of retail ETFs, some of which you may be interested in and some of which you're not. It's not a recommendation, although I have recommended one of them, which I mentioned before when we had Harley on and I recommended his mortgage ETF because he buys recent vintage mortgages, which yields 6% instead of the older ones which are, like, 3%.

                                    So – but yeah, Stephen's focus in those two areas is very cool. And I'm – I didn't know about him. I didn't know he was under the MarketWise banner. So, he's going to be my new – he's going to be the new guy under MarketWise that I'm fascinated with now. I want to read everything. I want to read all the options stuff. I want to read all the high-yield stuff. And knowing that he focuses on the fundamentals of the business, he's not just a trader, that to me is gold. That's where you get real conviction and those people – they're the ones I want to know about. The people who understand the business and then structure the trade.

                                    So, anyway, that was awesome. That was a fun interview and a fun episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we really truly did.

Announcer:                 The opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stansberry Research, its parent company, or affiliates.

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