Episode #92: “There Are Just A Few Things You Really Need to Know About Investing, and They Don’t Ever Change”
Guest: Andrew Tobias. Andrew is a Harvard grad who went on to write for New York Magazine, covering the world of finance. For several years he had a column in Time and frequently appeared in Parade. His work has also appeared in such places as The New York Times Sunday Magazine and on the cover of Harvard Magazine. His twelve books include three New York Times best-sellers, one of which is The Only Investment Guide You’ll Ever Need, with more than one million copies in print. He has received the Gerald Loeb Award for Distinguished Business and Financial Journalism, Harvard Magazine’s Smith-Weld Prize, GLSEN’s first Valedictorian Award, and the Consumer Federation of America Media Service Award.
Date Recorded: 1/30/18
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Summary: In Episode 92, we welcome investor, author, and activist, Andrew Tobias.
Meb starts by asking Andy about his background and introduction to investing. Andy gives us his origin story, with highlights including collecting stamps, an early introduction to the stock market, a trip behind the Iron Curtain which led to a brief dalliance with Communism, then his becoming a paper millionaire due to some creative accounting (then those monies disappearing). It’s a fascinating look back.
Next, Meb recalls a survey we conducted some quarters ago, soliciting readers’ favorite investing books of all time. Andy’s book from 1978, The Only Investment Guide You’ll Ever Need, turned out to be high on that list. Meb asks Andy to explain the thesis of the original book, and whether there have been any significant changes in subsequent editions.
Andy tells us “There are just a few things you really need to know about investing, and they don’t ever change. The problem is it’s hard to get people to really grab onto them.” He goes on to say that investing isn’t like cooking or chess, where the more you read/learn, the better. Instead, with investing, the more you read, the more you can get yourself into trouble. He gives us an example using commodity speculating. Given that so much about investing remains constant, Andy’s revisions in subsequent editions haven’t been too substantial.
Meb pushes a bit more, asking if there’s any subject about which Andy has changed his mind since the original publication.
Andy tells us he’s become a bigger fan of special opportunity investing. Most people aren’t looking for this type of thing. So, Andy discusses putting 80% of your portfolio into inexpensive index funds, but spreading the remaining 20% over 5-6 really interesting, exciting speculations. Most will go to $0, but maybe you hit with one or two, and those proceeds offset the losses and more. Plus, this satisfies the need to have something more exciting to do with your money.
Meb agrees with this idea, and asks about Andy’s speculative process – is it rooted in quant or is there a discretionary component? Andy answers by giving us an example with Support.com.
Next, the guys discuss valuations, comparing where we are now to where we were back in the early ‘80s. It seems we’re flip-flopped a bit in terms of interest rates and equity valuations.
This segues into private investing, with Andy telling us about how came to own farmland. Turned out to be a great investment, buying at $500 an acre and selling years later at $3K an acre. Meb agrees farmland is a great asset class, but it’s hard to allocate toward.
This dovetails into a few other private investments in which Andy has participated, most notably “Honest Tea,” which was purchased by Coca Cola, as well as a small, musical comedy, which went on to play on multiple continents over many years.
The guys bounce around a bit here, discussing the need to spread your bets in private market investing… lockups… the benefit of illiquidity… binary thinking… Andy’s firsthand experience with selling way too early…
There’s plenty more in this episode, including Andy’s concerns for our existential future, his most memorable trade, and finally, a product he endorses which might help tackle dementia and improve reflexes. Apparently, Tom Brady swears by it.
What are the details? Find out in Episode 92.
Links from the Episode:
- 00:50 – Introduction to Andy
- 1:12 – The Only Investment Guide You’ll Ever Need – Tobias
- 1:30 – Impressions on Costa Rica
- 2:48 – Andy’s earliest experience in investing
- 5:55 – What hasn’t changed in investing since Andrew’s first book
- 6:03 – Meb’s survey on the best investing book
- 11:44 – What has changed in investing
- 12:20 – A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing – Malkiel
- 16:13 – Process for picking stocks
- 21:06 – What are Andrew’s thoughts about investing in a world with sky-high valuations
- 24:06 – Investing in farmland
- 28:58 – Andrew’s process when it comes to private investing
- 37:02 – Challenges in finding the right bet in private investing
- 37:08 – Longboard study – “The Capitalism Distribution”
- 43:15 – What has Andrew’s brain occupied today
- 43:20 – Andrew’s blog
- 46:30 – What has been Andrew’s most memorable investment/trade
- 47:00 – Brain HQ
- 51:03 – Ways to keep up with Andrew – his website
Transcript of Episode 92:
Welcome Message: Welcome to “The Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: Welcome, podcast listeners. Today we have a fantastic show for you with one of our most fascinating guests. He’s kind of a real-world most interesting man, a prolific writer. You’ve seen his stuff in “New York Magazine,” “Esquire,” “The New York Times.” He’s written a dozen books, including a bunch of The New York Times Best Sellers, including one of my favourite books, “The Only Investment Guide You’ll Ever Need,” which has sold more than a million copies. He’s been a part of all sorts of other stuff, anti-smoking campaigns in Russia, insurance reform in the U.S. He’s our only guest that’s appeared on Letterman, Johnny Carson, and Oprah. We couldn’t be happier to have him here today. Welcome, Andy Tobias.
Andy: Well, thank you very much. Good to be with you.
Meb: Andy, thanks so much for taking the time out. You mentioned briefly that you’re getting ready to go to Costa Rica, and I was going to say I had one of the scariest days of my life in Costa Rica where when I graduated from university was trying to surf in Dominical, and I’m a terrible surfer, as our podcast listeners know, and my leash broke. I learnt a lot of lessons that day, never get in way over your head. So thank you for taking the time before you’re heading down there. Do you spend much time in Costa Rica in general?
Andy: No. I grew up in Manhattan, and so my general philosophy is, “If it’s not paved, it’s not safe.” So where there are bugs, and nature, and things, I get nervous, so things like zip-lining and surfing, which I totally get would be wonderful if I were not such a wuss. I had a nice dinner in Dominical, but, no, Costa Rica is a wonderful country, but, as you know, it’s one of the few without any army. It’s part of their constitution, and they are a peaceful, and literate, and wonderful people. But, no, I’m not going to be trekking to waterfalls, and over high bridges, and all that kind of stuff.
Meb: “Pura vita,” as the locals will say, and, podcast listeners, the biggest takeaway from this podcast is, “Get some Lizano sauce.” It’s Costa Rican sauce. It’s the best thing on the planet. All right, let’s get to…we’ve got so much that we’re going to talk about today, things I’d love to get into. You’ve got such a fascinating background across a lot of fields, but let’s start with investing. And let’s go back in time to your childhood. I remember, much like for many investors, a lot of formative experiences growing up, whether it’s your parents or it’s starting learning to invest. Tell me a little bit about setting the stage for how you originally started thinking about investing. I know you talked in one of your books or interviews about investing in maybe stamps or first-issued stamps, something or other, as a first experience. Maybe talk to us a little bit about that before we get into some other topics.
Andy: Well, I guess I’m sort of a collector. I’m competitive. I like to keep score. When I was five, my folks gave me $5 for my birthday, and when I was six, they gave me $6, and when I was seven, they gave me $7, and I sort of saw what was going on here. I tried to… You can’t save a whole lot of money from $5, but I like numbers, and I like to see them grow. So when I was about 10 and my brother was 14, our Uncle Lou, who was kind of our rich uncle, he gave each of us, I don’t remember what, but I think 10 shares of General Dynamics, and 10 shares of General Motors, and 100 of Alcoa or something. We would look at the stock pages every day, and nothing ever happened, you know. It would go up an eighth or a quarter, down an eighth or a quarter, back when stocks were quoted in fractions and all that. And it was boring, but it was still kind of exciting, and they did go up a little bit. So we had a little sense of that.
Stamps, it was so fun to collect stamps, and first day covers, and all that, and I would…probably some of your listeners had the same sort of parental dynamic. I would come down after adding up the value of all the different stamps, and organising them, and looking at a catalogue, and I would come down, and I would say to my parents, “Guess how much my stamp collection is worth,” you know, I’m 11 years old or something or 12 years old. In fact, it was worth $91 or something. And my father would say, “I don’t know, 2,000 bucks?” And my mother would say, “I don’t know, $14,” and I would feel so big. But I didn’t get involved really.
This was all background. I wound up going to taking three months behind the Iron Curtain when I was 16 and came back a little communist to my parents’ horror. And then I went to college, and a week before school started I got involved in student businesses, and that was the end of communism. And I wound up running the student businesses in college. So that’s when I really got involved and interested. And my stock options at that period, my first job when I was 21, the stock went from 6 to 140 in 18 months, and I was a little millionaire at age 21, sort of on paper. And then it would turn out there was six months to go before I can exercise my options. The creative accounting the company was practising was so creative, because that was a good thing back then. In the late ’60s, you were supposed to do creative accounting, but ours was so creative you could really only fairly term it “fraudulent accounting.” So the president went off to jail, and I went to business school and wrote a book about it. And from then on, people thought I knew something about money, and then they’ve been buying these books ever since. So lucky me.
Meb: So, Andy, we actually did maybe six months ago, I can’t remember, I sent out an article to our readers, podcast listeners, that said, “All right, send me your single one favourite investing book if you just had to give someone just one book.” And yours, congrats, was one of the top books. And so I re-read it again, and the really fun part about this book, and, listeners, we will post links to the show notes for all these things we talk about today, one of the best things about the book was, one, the original content was great, written in 1978, I believe. But it’s really fun also to read the new edition, because it looks back on a lot of the examples you gave. And I was laughing over coffee this past week, because you started out the book talking about how investors used to invest in Mexican bonds because they had paid a higher interest but never considered the currency risk. And fast-forward so many years later, what happened in Iceland and a lot of countries during the financial crisis where people were taking on a lot of risk in other countries. I just smiled, because it’s like 40 years later nothing has changed. So let’s talk about it. So the original parts of the book, and I’m going to quote you and then let you run with it. You described it as, “Live beneath your means. Get off the debt treadmill. Minimise your transaction costs. Trust no one.” This book, it tends to take you through it all, from buying tuna in bulk to avoiding variable annuities. So let’s talk a little bit about the thesis of the original book. In the ensuing decades, what has really been kind of any main changes, any thoughts? Has the thesis remained constant throughout?
Andy: Sure. Well, the basic idea is that there are just a few things you really need to know about investing. They don’t ever change. The problem is it’s hard to get people to really grab onto them. And so there’s nothing original in my book, but I tried hard to make it fun, and interesting, and vivid in some ways. The analogy I use is it’s not like cooking, or chess, or most other things where the more books you read, the better, within limits, you get. You become a better chess player, better at gardening, or whatever it is. With investing, there are just some basic things to know, keep your transaction costs low, don’t put all your eggs in one basket. You know, these are amazing original insights, and I’m sure no one ever thought of that before I came up with it, right? And the basics, and beyond that, if you read more books, you actually can wind up getting yourself in big trouble.
And I always use the example of commodities speculation. All I say about commodities speculation in the book is that if you do it you’re almost sure to lose your money. And then I take another paragraph to explain why so that you believe that first sentence, and that’s all you really need to know about commodities. But if you read a book or two about it, it’s such an interesting game, and we all like games, at least a lot of us do, and it kind of becomes irresistible. And, of course, the books that you read aren’t going to tell you that you’re going to lose money. They’re going to show you the amazing way to turn $10,000 into $1 million in 3 weeks and all that kind of stuff. So there’s some risk that you’ll actually do it, and you’ll take your $10,000, and if you’re really unlucky, it’ll grow to $20,000 after a week, and then you’re hooked. And then eventually you will lose your money. A couple of your listeners are really good at this, and they work in ways that maybe they actually have made money, but it’s at the expense of almost everybody else listening if they speculate in commodities, because it’s a zero-sum game or actually a little worse than that because of the transaction costs.
Anyhow, so it’s this basic stuff, but the book, this wasn’t my idea to call the book this. I said something about I want it to be the only investment guide they’ll ever need, and they said, “Yes, yes. That’s the title.” So the book, which came out in 1978, called “The Only Investment Guide You’ll Ever Need,” and it is so embarrassing to have to revise it, and revise it, and revise it. Every five or six years they do something crazy, like gold is no longer set at $35 an ounce by law, or they invent the internet, or on and on and on. These things happen. The tax code changes. So when the book first came out, the top federal bracket was 70%. I think you know it’s changed a little bit. So every five or six years I revise it. But I’ve got to tell you, it is so much fun for me, because much of it, literally word for word, has not changed. And maybe some of the examples are getting a little stale, but many of the anecdotes are just as real now as they were 40 years ago, and so I don’t change them. On the other hand, of course, tons of stuff, Roth IRAs didn’t exist, IRAs didn’t exist, index funds didn’t exist. So it’s up-to-date until I have to revise it again.
Meb: You know, it’s funny, and I was going to laugh, because as soon as you gave that first advice or paragraph, I was going to say, “All right, we can just end the podcast,” because that’s simple advice. Everyone should take it, but we’ve got lots more to talk about. But a funny example, you know, our friend Jason Zweig, you know, a writer, he says, “My job is to write the same message but write it 100 times in an interesting way that people will continue to read it, because the simple stuff is really easy.” I was smiling as you were describing the commodities portion, because every three to five years a new shiny object comes on that fascinates the investor populace and get swept up in, whether it’s internet stocks in the late 90s, whether it’s the bricks in the mid-2000s, and commodities, and you’re probably going to have to update it in a few years again now and talk about…
Meb: …cryptocurrencies and marijuana stocks, right?
Andy: Yeah, yeah, yeah, yeah, yeah. The first bubbles that people, they know about the tulips, and they know about the Mississippi Company, and it’s always something. And so you just want to sort of learn the right habits and get used to recognising things that are too good to be true, and, obviously, we’ll make mistakes. I’m constantly making mistakes, but you can be smarter than the average bear, because the average bear isn’t that smart.
Meb: So we talk a lot about what stayed constant and the simple basics of living beneath your means, and not getting in a bunch of debt, and a simple low-cost asset allocation. Those are all great long-term strategies. Is there anything that actually you’ve changed your mind on a lot or even a little over the past, say, 30 years, where you say, “You know what, this is actually in my opinion quite different from the first time in the book,” or maybe it’s just evolved or changed quite a bit? Is there anything that really sticks out?
Andy: Not too much. I guess somewhat responsive to that notion is I’m a big fan of “A Random Walk Down Wall Street,” the famous book that basically says everything is already baked into the price of the stock unless you’re doing insider trading and willing to risk going to jail. So there’s no point trying to beat the market. And for almost everybody that really is true, because one of the smartest things I’ve ever heard was from a big famous investor, Mike Steinberg. He was asked, “What’s the best advice you can give average people?” And he thought about it for a second, and he said, “I’m their competition.” So even if Warren Buffett clearly can beat the market, and a guy named Peter Lynch used to do all this, and there are people who can beat the market, almost everybody cannot. And even some of the ones who, this doesn’t apply to Warren Buffett or Peter Lynch, but some who do tremendously well for a long time, they blow up. It turns out that things go against them, they use too much leverage. I know, I have a friend who ran $1.5 million into $85 million. He’s brilliant, probably on the Asperger’s spectrum someplace. He’s so smart, and focused, and all that. And one night he forgot to hedge a position and lost all the $85 million. So it’s not an easy game.
Having said that, I love to look for these crazy little special opportunities or special situations which, because they’re so small typically, most people aren’t paying any attention to, and I think sometimes you can get an edge. So in the book I suggest that if you’re fascinated by this and you actually like to play a little bit, it’s not stupid to put maybe 80% of the money you want exposed to the stock market, keep that in very low-expense index funds, that sort of thing. But with maybe 20%, I mean, let’s say you have $300,000 that you want to have in the stock market, take $30,000 of it, of the $300,000, or even $40,000 or $50,000, and spread that over 5 or 6 really interesting speculations that you’re excited about, not all at once, but as you come to hear about them. That’s not necessarily dumb, because two, or three, or four, or maybe all five of them are going to go to zero. If they all go to zero, that’s not so great.
But the ones that you lose money on, I think it’s still $3,000 a year, you can take against your ordinary income, but if 1 or 2 really hit, even if you wind up breaking even, so the money you lost on the bad ones has only broken even, on the good 1 or 2 hopefully you do a lot better than break even. But even then you come out ahead, because the good ones are either lightly taxed as long-term capital gains, or you use that to fund the same charitable giving you would have done anyway through something like Fidelity Gift Fund or Schwab has one, and a couple others have them. And so by tax control, which you don’t have exactly in a mutual fund, it’s a way to have the odds a little bit with you and also to satisfy that need a lot of us feel to have something more exciting to do than just the index funds.
Meb: There’s no question. We actually talk a lot about that on the podcasts, where people have, whether it’s genetic, whether it’s behavioural, whatever it is, just that gambling itch or that itch to be involved, and it’s good, in some sense, you know. I say, look, if it keeps you interested, and aware, and involved, as long as you’re aware of all your behavioural biases that we have, and you mentioned the worst possible thing that could happen to a young investor is probably they go invest in something, and it goes up 100%, or 10x, or whatever it is, because then they think they’re brilliant and it’s going to repeat over and over, and then they get taken to the woodshed. There are so many gems in there, in what you’re talking about, even some of the richest people in the world. I remember the resilient commodity investor and CEO Batista who at some point, I think, was top 5 wealth in the world and then eventually went to, I think, 0, but from $35 billion. A lot of different lessons in what you talked about, but let’s talk a little bit about your speculative bucket. Is there any sort of process? I remember reading in the book, you mentioned screens from Joel Greenblatt. Is it something where you kind of are just totally discretionary and kind of picking stocks for fun that you think are interesting? Is there any sort of quant screens? Is it your buddy down the street? What’s the kind of personal process for you?
Andy: It’s much more opportunistic. Joel Greenblatt, who you mentioned, is brilliant, and amazing, and so logical, and it’s all a tremendous amount of analysis. But I’ll give you two examples of, I mean, there are so many different examples, but one that I’m high on. A little more than a year ago, a young guy at a conference, not an investment conference, but just a general sort of thing, we had a little panel, and he was talking about this. I knew nothing about it, but it’s a company called support.com. The symbol is SPRT. And, apparently, it was a pretty big company and just went horribly wrong, and so they have $120 million net operating losses, which conceivably could be valuable in some way someday by carrying them forward. You don’t have to pay taxes on profits. But it was a basket case, and that’s not of interest. But what was of interest, and the reason this young guy started talking about it, and I learnt more about it, and I now have a lot of this, is, first off, they have a…a whole new CEO came in and a whole new management team. They bought a bunch of the stock themselves cheap, and a value player hedge fund kind of person got into it. And so it’s a whole new team, and their goal was to stop the bleeding, and if they could stop the bleeding, the stock at the time was about 3.00, and by the time I saw it, it was about 2.25. Today it’s about 2.70. And they had about $2.75 a share in cash, so if they could stop the bleeding and didn’t lower the amount of cash, you’re getting the company for free. It’s almost like a vengram kind of deal. And, sure enough, they had been able to stop the bleeding, so they have something like $2.75 in cash.
I haven’t counted the money myself, and I don’t know what’s happened in the last few months, but something like that. And they have a business that conceivably is going to be worth 1x revenue or something, which would be another three bucks, and they’ve got these net operating losses. So at a time when the stock market is high and it seems to me may have maybe more risk than reward, although who knows what’s going to happen, but today isn’t such a good day for the market, down 350 or something as we speak. But to buy a stock that has as much cash as you’re paying for the share, probably it… I mean, it could go to zero. Anything could happen, they could do a terrible job, there could be some crazy thing happen, but probably that’s in the long-term sort of [inaudible 00:19:07], at least potentially. So it’s pretty conservative, but if you add the value of what might be the value of the company at $3.00 or $4.00 on top of the $2.75, you’ve doubled your money. And so my hope, who knows, but my hope with this, I like it a lot, so I have a bunch of it. I’m hoping that at a time when the bank pays a tenth of a percent interest or whatever, I think, I’m getting these excited ads where, “We have a 1% CD.” Wow, 1%. If I get lucky with this, and it doubles in the next year or two, that’s the kind of thing I like. Clearly there are no guarantees, and in my little daily blog, whenever I make a suggestion, I always say, “Only with money you can truly afford to lose.” Because, believe me, and I’ve lost my readers’ money on any number of things that didn’t work out the way I’d hoped, and this one may not either. But, anyway, so that’s one end of it.
Meb: That’s a great example. I mean, that falls in my mind kind of, like you mentioned, under Graham’s screen or special situations. There used to be a method back in the day when I was discretionary where there would be a screen for a lot of biotech companies, the same sort of thing, as how much cash do you have, what’s the kind of worst-case scenarios for a lot of these stocks that are either losing money or right at break-even, or even slightly making money. I was laughing a couple of times during your example, because, one, when I was watching a lot of old videos of you, by the way, with some of the interviews and when you’re on Letterman. And my favourite part, sorry to say, wasn’t the actual interview, is the commercials, because it was such a good example of the times. And there were commercials for pantyhose, which for young listeners, by the way, is essentially like Spanx for a generation ago. But the comments you make where times where interest rates were high single digits, low double digits. It was just such a different investing world than today where essentially rates are coming up at least on the short end but nothing like a world when you could have bought a 10% bond and just retire on the interest.
This is a little bit tangential, but I wanted to mention it earlier. Is there anything about the environment…and you talk about it in the book, and you’ve seen so many different cycles, to where the basic advice, we had a pretty big market cap bubble in the late ’90s, and we’ve seen other ones, like Japan in the ’80s, where markets get pretty far out of whack. Is there anything in general, the advice you think of? Is it just you asset-allocate and rebalance? Is it you consider taking some chips off the table? With valuations, do not look at broad valuations at all and stay focused on the bottom up? Do you have any general thoughts there?
Andy: Well, I’m not a professional money manager. I understand what asset-allocation is, of course, and I’ve done a little writing about some of that. But I don’t really think of it that way. First of all, the big frame to me, the really big thing, is that we are at a time of crazy low interest rates historically and an all-time record high stock market. If you started investing in 1982, for example, when I got to interview the chairman of the Federal Reserve, and he was trying to keep the world from ending, and the Dow was 777, and treasuries were yielding 15%, you would have a pretty good run as interest rates gradually came down from 15% to, what are they now, 1% or 2%. And as the market went from 777 to 26,000, I clearly don’t expect and hope it’s not going to reverse it down to 777 again, I hope. But interest rates aren’t going to get a lot lower, and at some point, it could be a long time from now or it could be starting tomorrow, it’s already sort of started and beginning to creep up a little bit, but over the next 10, 20, 30 years, interest rates could get back to more normal levels.
And when that happens, first of all, bonds, including super-safe things like treasuries, but if they’re long-term treasuries that are levered by maturity, value bonds, I would never buy long-term bonds here, except for some crazy speculative things that aren’t really like bonds that you could speculate on Puerto Rico bonds, 25 cents on the dollar if you have some reason to do that. But that has nothing to do with actual…it’s not really bond investing. So, bonds are a bubble in a sense, or at least it’s something I just don’t have any in buying asset allocation. And the normal, the regular kind of index funds, the S&P 500, or whatever, stocks, they may continue to go up at a steady modest rate for years, and years, and years. That would be great, but it doesn’t usually work that way. Usually every so often, and often out of the blue, you get a really bad time, and then it will recover, but I’m not in lots of big-cap stocks. Much of my stuff is illiquid and private kinds of deals that are fascinating, and if they work out, some of them could make the world better, which is a good reason to invest.
Meb: And it’s a great segue, and I want to get into that, because there’s two things you and I share in common, one, growing interest in private investing. I’ve been doing a fair amount. I’ve been talking to listeners through this since 2014. And you’re also a farmer. Do you still own your farm in Iowa, or is that long gone?
Andy: No, it’s long gone, but I was so lucky, but that opportunity doesn’t happen very often. But in 1986 or 1987, whenever Chernobyl went radioactive in the Ukraine, which used to be the bread basket for Soviet Union and so on, Ukraine went radioactive. I was talking to a much smarter friend of mine. Actually her name is Laura Sloate, and she’s kind of famous. She’s blind and has been a legend on Wall Street even though she can’t see. She is quite a successful investor and a professor and so on and so forth. “So, Laura, what are you doing these days?” And she said, “Well, I just bought a farm.” I said, “What? In 1986, you bought a farm. You live in Manhattan.” I didn’t see her farming a whole lot. But she explained that Chernobyl kind of reminds us that food is something that is probably not going to go out of fashion, and this was a time…almost none of your listeners are old enough to remember, but this was a time that prices were so low for corn, and soybeans, and all that that farmers were going bankrupt left and right, and there was even a caravan of tractors that drove, I don’t know how many hundreds or thousands of tractors, drove all the way to Washington to protest and to ask for more price supports and so on. And so farms were going for very, very low prices.
So I hung out with Laura and thought about it and remembered that I had given a speech for the Security National Bank in Sioux City, Iowa. They had me out there to do my thing. And they were really nice people, but I couldn’t imagine they would remember me. So I called them up and said, “Do you remember a couple of years ago when you had me?” “Oh, yeah, yeah, yeah.” I said, “Well, look, I’m really embarrassed to even ask you this, because the last thing I want to be is some sort of a New York City vulture taking advantage of people’s misfortune, but would it be awful to buy a farm?” And they said, “No, no, no. We want outside investment, and we have people really trying to sell, and we need buyers.” And I said, “Well, if I did it, is there some way I could… I mean, I’m not going to go out there and manage it. Is there…” They said, “No, we have a whole department. That’s what we do. We’re an Iowa bank. We have a whole department that manages farms for investors.”
So I wound up buying 294 acres of what I came to learn was, the term for it is really bad ground, really bad soil. But it was good enough to grow…I think we got 85 bushels of corn per acre kind of year in and year out typically, and I learnt that’s not 85 bushels with the husks, and the tusks, and the things, that’s just the kernels. I mean, it’s unbelievable. So I had so much fun with my farm manager, who was this wonderful guy, just by email and on the telephone. I only saw the farm once, but I learnt about my farm. He would say, “Part of your corn’s leaning.” “Because of the winds and my corn is leaning? Can’t you prop it up or what?” So it was fun, but I got in when it was so low, and I don’t like a lot of debt, but this was mortgaged just against the farm itself, so the actual cash involved was like 20% or something. I wound up over 20 years. The cash-on-cash return from just the rent from the farmer was great. And then I paid, I think, $500 an acre, and I sold for $3,000 an acre, but I was buying at a time when nobody in his right mind would buy farmland. That’s why it was so cheap.
Meb: That’s a universal sort of investment axiom, right? When there’s blood in the streets, when everyone hates it. For long-time listeners, farmland certainly in the early ’80s just got decimated, and so, Andy, my father’s side of the family grew up on a farm in Nebraska. No running water, no indoor plumbing. They eventually moved to Kansas where a lot of our family on that side still resides and does farming. And so when my father passed years ago, we inherited some farmland. So I’ve been a very long-time student of growing up on the farm and kind of witnessing, and like any asset class goes through many cycles. But we tweeted a few years ago that farmland, particularly as a lot of institutions got interested, was one of the best-performing asset classes, really since the period you’re describing, the ’80s, ’90s, and 2000s. It’s come off a little bit in the last few years, but it’s also notoriously a hard asset class for people to allocate to. There’s not really any real estate investment trust publicly. It’s really a private investment, and we had another guy that was doing blueberry farms down in South America on the podcast. It’s certainly an uncorrelated asset class but a traditional one that’s pretty hard to allocate to. That’s a fun study.
So while we’re in this private realm, private investing, and that can mean venture capital, it can mean angel investing, on the institutional side, it can mean leveraged buyouts, there’s a lot of kind of different phrases for it, but it’s increasingly becoming blurred in the past decade. We’ve seen a lot of companies, particularly now people talk about the tech unicorns that stay private for much longer. Uber, at whatever their current valuation is, it’s got $40 billion, still being a private company, has caused a lot of investors to reignite their interest in private investing. What’s kind of your experience? What’s your process? Are you doing the same sort of process with public equities, or is it more cause-driven? Are you looking for the 100x home run grand slam? How do you think about that world?
Andy: Well, I’m lucky enough to know enough people and somehow be exposed to…of course I’m never exposed to the really great things, but people are forever suggesting things. And I have lost so much money in so many things with good intentions. One or two might have been a little sketchy in terms of their morality, but a good tenth have failed. But others worked, and I’ll give you a couple examples of two where the results are now known. I have many others where I’m dying to know what’s going to happen, and I’m eager to tell you about those, too. But one day, maybe, I don’t know, 15 or 20 years ago now, I was in a conference thing between Christmas and New Year’s, a general social sort of thing, or it wasn’t a financial thing. A friend of mine, or an acquaintance at least, who was a business professor at Yale, a smart guy with crazy professor kind of hair and all that, he’s walking down the hall, and he sees me, and he says, “Andy, you got a second?” “Sure.” And he’s carrying one of these kind of soft-sided briefcases, almost like students used to take to school, and he says, “Do you like iced tea?” I said, “Yeah, I like iced tea.” He pulls out this bottle of iced tea, except it wasn’t iced, it was in his briefcase.
And he said, “I’m starting this company, and take a taste.” So the bottle looked pretty good, and I liked the name. The name was Honest Tea, and, you know, “Honest Tea is the best policy,” and “Do you want to buy equity in Honest Tea?” and all this kind of stuff. And the label looked good, but I took a sip. It was terrible. He said, “It’s great. It’s so healthy. There’s no sweeteners, and it’s sourced from,” I don’t know, “the rain forest,” or something or other. So I didn’t like the tea at all, but I knew he was really smart, and I can’t resist stuff like this. I love getting in on the ground floor and all that. So I was one of the first investors in this Honest Tea, not a huge amount of money. And actually one of the lessons was the valuation that they were letting us come in at, even though it was basically friends and family sort of thing, it was way high. So, anyhow, a lot of your listeners probably either drink Honest Tea or see it. Coca-Cola wound up buying the thing, and it’s everywhere, and I still like it. If you can get the glass bottle ones, those are at health stores. The best ones are the Cinnamon Sunrise and the Ginger one. But it went from this guy’s briefcase, and they were making like…1,000 cases was all they had made, and now Coca-Cola distributes it, probably all over the world, but certainly it’s everywhere in the U.S. So that one worked out. It was nothing like 100x. It was probably 3x or 4x at the end of the day, because the valuation on the way in was so high. But that was a good one.
Meb: That’s a great example. It’s a funny thing about private investing, because I’ve kind of changed my colours on it over the years. So, your method here was almost, you mentioned Peter Lynch earlier, kind of investing in what you know despite the fact it tasted terrible. But you liked the person, you were interested. You know, I think that’s a great way for at least an introductory screen, but one of the benefits of private investing that I’ve come to appreciate is actually a feature that people had considered a negative, which is the fact there is no liquidity, and the reason being is that you can’t sell it. And so many of the behavioural biases people have with stocks is that when they start going down or there is a bear market they end up puking it all out and they sell it. They can’t take any more. It’s painful. But a lot of the private investments, you’re stuck until there’s illiquidity in it. So I actually think that’s a pretty good thing rather than bad thing. Are there any others that actually come to mind or anything that’s particularly interesting today?
Andy: Let me tell you, another success that’s finished, and then it would be maybe more fun to tell you about some of the ones that are brewing. But the bookend of that, where the valuation I get in was very low, and I did make 50x or 100x, but was very similar in the sense that it was completely unplanned. It was almost as random as just seeing this guy in the hallway. A friend called me. This was a long time ago. A friend called and said, “Hey, there’s some kind of show playing around the corner from you in a high school theatre. It’s supposed to be very funny. It’s five bucks. Do you want to go?” Well, I had five bucks even back then. It was a long time ago. And, “Okay, sure.” So we go around the corner, and we saw a thing called “Nunsense,” and it was ridiculous and sophomoric. It was a musical comedy about putting on a talent show to raise the money to bury 52 dead nuns who had eaten a poisoned vichyssoise, and the Little Sisters of Hoboken were putting on this fundraiser, and that was the show. But it was a ridiculous show, but so much fun, and the audience loved it. And we were just happy with just, like, tears from laughing.
So when the thing was over, I said to my friend, “Why is this in a high school? Why isn’t this Off-Broadway someplace and $49 instead of 5 bucks?” And he said, “Well, it’s funny you mention that. They’re trying to do that. Do you want to meet the producer? He is here.” To this day I don’t know if it was a setup, probably not, because I didn’t have any money, to speak of. I had invested in Broadway shows before, but, you know, like $1,500, and always losing money, but it was a tax write-off, and back then between the federal, state, and city taxes, it was Uncle Sam and New York, it paid 77% of the loss. So I was used to that. So the producer came over. I said, “So you’re trying to move it to Off-Broadway. What’s the overall capitalisation?” And I knew enough about this stuff to figure that, well, it’s probably about three-quarters of $1 million. Again, this was many years ago. And he said, “A hundred and fifty.” And I thought to myself, “Really? Wow. That makes my odds 5 or 6 times as good in case it works, because I’m getting in at $150,000 valuation instead of a three-quarters million.”
And I said, “Well, how much of that have you got?” And he said, “We have 125. We have 25 to go.” And, basically, it was a little bit more drawn out than this, but basically I said, “Well, look, this is crazy and so much more than I’ve ever put into anything, something as crazy as a Broadway show, but if I did the whole 25 so you could just be done with raising money and you could do it, I know that normally, but please forgive me if this is incredibly indelicate, I don’t want to offend you, but I know normally that for every 1% of the show you put up, after you get your 1% back, then you get 0.5% of the profits. If I did the whole thing, the total 25 so you could get going, in case it makes a profit, instead of 0.5% for each 1%, could I have the whole 1% for each 1%?” And he said, “Sure.” I love him to this day for having said that, so I doubled my odds again, because, I mean, I assumed it wouldn’t make money, but if it did, I was going to get twice as much as you would normally get. So it wound up playing for…it’s still playing some places, but I wound up getting my little piece for 25 years. It played in, I think, four or five continents, and it had a spin-off called “The Meshuggah-Nuns” and another one called “Nunsense A-Men” and on and on and on. So how planned is that in your asset allocation? You go to a show, you think it’s funny, you get a great deal, and, yeah, that’s paid for a lot of mistakes, “Nunsense.”
Meb: Well, then that’s the way a lot of private investments work, and public as well. There’s a great study my friends did at Longboard Capital. J.P. Morgan has done this. There is a new academic white paper that came out that talks about, even in the public market, a very small percentage of stocks account for essentially all the gains. And I think it’s even as low as 10% or 20% of all stocks account for all the gains, because you have these massive winners. It’s capitalism where you have the Coca-Colas, the Walmarts, the McDonalds, the Amazons, Apples of the world that have these multi 100% or 1,000% returns, and that’s why indexing works. But that’s also the same thing in the private world. The challenge in the private world is often a lot of investors, individuals, the mistake they make is they place too few bets, and so in many cases if you’re only betting on two, four, or six private investments, all of them may go to zero, whereas if you put small bets on a number and you have that tenbagger, that unicorn, that makes up for all of them. By the way, I live in Los Angeles in Manhattan Beach, and so investing in movies and TV, and I’m a pleasant watcher. I love my friends that are doing it, but to date it’s not something I’m involved in. I’m too scared. Same thing with restaurants.
Andy: You’re absolutely right. You don’t want to own a boat yourself. You want to have friends with boats and bring them a very nice bottle of champagne or something when you get invited on the boat. And you don’t want to invest in reviews, or Broadway plays, or whatever unless you are absolutely prepared to lose your money and the odds are stacked against you, because normally you don’t get 1% for each 1%, you get 0.5%. Even private equity funds and hedge funds, the fees are so high and the carried interest and so on that it can work out, but it’s tough. I’ve been in a few hedge fund kinds of things that were run by very smart people, one in particular that I won’t name. It was a small thing, but the guy is brilliant and doesn’t mind telling you how brilliant he is and all that.
When he had lost 70% of our money, he finally closed the fund, even though he is brilliant and knows more about tech. This went back a long time. If I can give you another example of just how hard this is, I’m in 1 private equity fund that’s been after about 10 years. It’s just winding up, I think. They’ve had two successes that I really remember. At one point they said, “Hey, we’re about to distribute you whatever number of shares of Zynga.” And I had heard of Zynga. They’ve got all the games and stuff. I’m a “Words with Friends” addict, so I knew what Zynga was. But, apparently, our basis in Zynga was, I think, six cents or something per share, because this friend bought a stake back long before it went public. And it was going public at 10. So, from 6 cents to $10, you know, even though we didn’t have…I only had a modest amount, but we had to wait six months before we could sell it.
And by the time we were allowed to sell it, it was $3 or something like that. Okay. So, by the way, that’s still kind of awesome to go from six cents or whatever it was to $3, so I couldn’t complain too much, but I was thinking, “Boy, the next time, if we ever get another one of these distributions or something else, I’m not waiting around to the extent it’s legal. I have to check, but I’m going to short it if it’s legal to short it and lock in my profit.” Anyhow, so a couple years passed, and this past summer we got a notice that some company I had never heard of, a biotech company, we were going to start getting our distribution, and it wasn’t subject to a lock-up. The minute we got it we could sell it. And so I called my friend who runs the fund, who is brilliant when it comes to biotech, and he is the one who discovered this company and decided to invest in it and so on. And I said, “So what do you think? Are you allowed to give me any advice, or should I hold it? Should I sell it?”
Our basis in this one was, I think, $5 a share, and it was like $25. So pretty fantastic, five times, even though there were other things that had lost money and so on, but it was great. He said, “You know, it’s so hard to know with these things.” He held the Zynga himself, and so the same thing happened to him. He said, “I had another one where I sold it right away and it went way up. You don’t know what to do. It’s a good company, but I’m selling mine,” is what he said. And so this is the guy who really knows the company. This is the guy who’s way…I mean, this is a rich guy. He’s made a fortune being smart about these things. So he is selling his, and I sold mine. I got about $22, I think. That was great. That was this past August. Stock today, the symbol is AMAB, stock, I just looked, is $106, and we sold at $22, right? If it had been up to me, I probably would have sold half and kept half, because I know I don’t know anything and I figure I am cautious. But months later, not years later, this was August, and now it’s half a year later, and it’s $106, and it just reminds me how hard this is. He’s brilliant. He really knew the company. He left 600% on the table, you know, on this thing. It’s a tough game.
Meb: Andy, you know it’s funny. We often talk about investors here where there are so many of these emotional behavioural components of shoulda, coulda, woulda. We actually recommend what your mentioned, which is often sell a half or sell a third. That way you never have the entire, you know, emotional wrapped up in something. And despite that advice, so many investors we talk to, they never want to do that, though. And we have a very sophisticated phrase called “going halvsies,” which is an old kind of adolescent phrase. But those are such fun examples, because even in your case of your friend, who is a very informed, brilliant, wealthy investor, you never know with markets, and that’s what makes markets so fun.
Listen, we’ve got to start winding this down, because we have only a few more minutes. I can keep you for a few more hours. We didn’t even get into taxes, or politics, or anything else fun. We’ll have to have you back on sometime again. But I wanted to wrap up with kind of two more questions. So you’ve done so much in your career. What’s got your brain occupied these days? I see you’re still blogging, which is awesome. What do you spend most of your time thinking about these days, or what are you most excited about working on going forward?
Andy: Well, I will tell you, and I don’t need to sound…this is going to make me sound completely lunatic, I guess. But here’s what I spend most of my time thinking about and then trying to work toward. I think about the fact that after 10,000 human generations or maybe 15,000, because they just discovered some older fossils, I guess, early Homo sapiens, but 10,000 generations, 20 years a generation, 200,000 years of shivering, and suffering, and itching, and smelling awful, and being afraid of saber-toothed tigers, and everybody dying so young, and the plague, and just awful, after 10,000 generations like that, we are suddenly at the moment where everybody listening to this has the most amazing life, better than any czar, or emperor, or empress, or queen, or king ever had until maybe 100 years ago. We have air conditioning. Anybody listening to this probably has enough to eat whenever he or she wants. We have magic in our pockets.
This little iPhone thing, which has all the world’s information, etc., etc., I won’t take your time going through the whole thing, because everybody knows this, but think about it. We can fly, and we can watch movies while we fly, and we can have dinner while we’re watching movies while we fly. And we have 10 or 20 years as a species to get on a sustainable trajectory, or else, you know, within 100 or 200 years the planet will still be here and the cockroaches will still be here, but our little species will have disappeared. And there’s so much more to say about it. One thing that everybody should read if you haven’t is a wonderful book called “Homo Deus.” Homo erectus is when we learnt to stand up, and then Homo sapiens is when we got smart, and now Homo sapiens is just about done. Homo deus is when we become gods of the kind who are jealous, and throw things at each other, but have exoskeletons and Google implanted in their brain, and can fly. So read “Homo Deus.”
But we have 10 or 20 years to get this right, and from my point of view, when you have leaders like Barack Obama, and Pope Francis, and Angela Merkel, and whatever, we have a shot. We’ll probably hurtle off the rails and go extinct, but we have a shot. And from my point of view, when you have great thinkers like our current president, and Putin, and some others, it’s very concerning. So I spend most of my time trying to help elect Democrats, and that is going to get half the people in your… Don’t edit that part out. That’s going to get half the people in your podcast to unsubscribe, but it’s not your fault, it’s my fault.
Meb: So something I say in every podcast offends at least half the populace, so don’t worry, it’s totally fine. So, good, that means you’re going to be writing a new book called “The Only Guide to the Future You’ll Ever Need.”
Andy: Well, I write my little daily… Mostly I write emails, asking people for money, but it’s my highest best use.
Meb: I love it. The last question, which we always wind down in with our guests over this cycle, is what has been over your career, this could be good, it could be bad, I mean, if you mentioned it already, that’s fine, what’s been your most memorable investment or trade, investment, trade, whatever you like?
Andy: Well, there have been so many, and I’ve told you about two of them. So let me tell you one that hasn’t happened yet. Well, I mean, we’ll see how it turns out. I have several like this, but one that your listeners could actually play with. They can’t invest in it, but there’s a thing called BrainHQ. BrainHQ are exercises for your brain. It turns out that crossword puzzles don’t do any good for you, and Lumosity was fined $200 million by the Federal Trade Commission for making unsubstantiated claims and all that stuff. BrainHQ has more than 100 peer-reviewed studies, but one in particular was a 10-year study of 2,800 people, and 700 of them did crossword puzzles or something, and they had no effect. Seven hundred did nothing, no effect. Seven hundred did 10 hours of BrainHQ exercise, and 10 years later the incidence of dementia among this group was 33% lower than the control groups. And the last 700 did 10 hours that first year and then like a booster shot of, I think, 4 and a half hours in the third or fourth year, and at the end of the 10 years their incidence of dementia was down 48%.
And, by the way, it’s free unless you…we hope you’ll upgrade and do the whatever it is, $10 a month or something. So I’ve had an investment in this for 13 years now. Never gotten a dime back, and they never get anything, but my fantasy is they haven’t done this study, but if it has that kind of results if you just do 10 hours the first year and a little bit the fourth year, what if you did 1 hour a month for the rest of your life? I think the incidence of dementia goes down. You know, it also makes you sharper, and auto insurance companies give it away free, because they have fewer accidents among their seniors. Tom Brady swears by it. It’s part of his workout.
Meb: Not to interrupt you, but what is the actual interface? Is it games? Is it puzzles? Is it questions? Is it memorisation?
Andy: Well, you know, it’s a bunch of things you have to do on the computer screen or on your mobile phone that are frankly not tremendous fun. I love playing “Words with Friends,” but I guess it doesn’t make you smarter. This is kind of frustrating, because you’ve got to kind of see where the sheep are, and then one of them disappears, and you’ve got to remember where it was. And it goes faster and faster, and I’m thinking, “Hey, I’m just smart. I always do well on tests.” It’s very frustrating and annoying, but it’s not painful or anything. I can’t honestly tell you it’s huge fun.
Some people may find it fun. But it’s effective, and so my fantasy is, imagine, obviously, not likely to happen, but imagine, if Medicare said to everybody, because it’s all computer-based, so they can check on you, say, “Look, we will pay you $30 an hour or $40 an hour up to 10 or 12 hours a year to do these exercises, and we’ll know you’ve done them, because it’s all on the computer and hooked into our big computer. And we won’t literally send you a check. We’ll just lower your Medicare premiums by $30 a month for every month you do this,” and suddenly millions of people will say, “Wow, that’s a lot more than I make as a Walmart greeter, or just sitting here, and if the government’s really willing to do this, there must be something to it. I don’t want to have dementia. I don’t want to become these awful things that happen as you get older. I want to have sharper reflexes. If it’s good enough for Tom Brady, and he swears by it, and he’s not old, etc., etc., etc.” So who knows what will happen? It’s hard, because it’s hard to get people to do exercises. But this is the kind of investment that, first of all, I wouldn’t mind making 10x or 100x my money, but it’s so exciting to be part of something that could… Imagine if we could cut the incidence of dementia by 20%, or 30%, or 40%, or 50%. It would have such an impact on those poor people, on their families and caregivers, on our healthcare budget. And so, yeah, private investing can be interesting and fun. We’ll find out whether it can be profitable.
Meb: I’m going to download it, because, A, my memory is horrific, and I’m even worse at crosswords, so I’m actually happy to hear that about the crossword part, because that’s my world’s probably worst skill. Andy, where can people follow you, keep updated? What’s the best places?
Andy: andrewtobias.com. Simple as that.
Meb: That’s great. We’ll post links to all the show notes with that, Twitter handle, books, etc. Andy, it’s been so much fun. Thanks for taking the time today.
Andy: Thank you. A lot of fun.
Meb: Listeners, you can always find the show notes. We’ll add them in mebfaber.com/podcasts. If you liked the podcast, hate it, whatever, please leave us a review. And you can always subscribe on iTunes, Castro, Stitcher, Overcast, any of the apps. Thanks for listening, friends, and good investing.