Episode #125: Tom Barton, White Rock Capital, “The Biggest Problem Investors Have is Things Change…and They Don’t Change”
Guest: Tom Barton. Tom is the Founder, President, and General Partner of White Rock Capital. He helped build the first multibillion-dollar short-selling hedge fund at Feshbach Brothers in the 1980s, where he exposed dozens of stock frauds. Then he became an early-stage investor, going long on health foods and satellite TV. Now he runs White Rock Capital, where much of his focus is on investments in gene-therapy firms.
Date Recorded: 10/04/18 | Run-Time: 1:25:50
Summary: We start by going way back, after Tom graduated from Vanderbilt. He walks us through his early career experiences which helped him sharpen his business analysis skills, as well as his operational skills. He developed a great understanding of different industries, yet also what it was like to actually work in them. This was the foundation for the short-selling career that was soon to begin.
In 1983 Tom went to work for a wealthy Dallas family, and in the process met one of the original fraud short-sellers, nicknamed “The Mortician”. Tom knew nothing about stocks at that point, but under the guidance of his new mentor, realized that his analytical skills aligned perfectly with sniffing out short-selling candidates. He reasoned “isn’t it easier to spot something that’s going to fail than be certain on something that’s going to succeed?” He then began digging into the research, and finding slews of fraudulent companies.
What follows is an incredibly entertaining story-after-story of the various frauds Tom sniffed out (and made money on). There was a company claiming it could change the molecular composition of water… one deceiving customers about building-restoration after fires… a biotech claiming it could cure HIV… By the time 1990 rolled around, Tom’s returns were over 80% and he had generated a couple billion dollars.
There’s a great bit in here about “The Wolf of Wall Street” (Stratton Oakmont). Tom is the guy who took them down. Related, the “Wolf” himself snaked an apartment out from underneath Meb a few years ago out here in Manhattan Beach, CA. The guys share a laugh over this. Eventually the conversation morphs from short-selling to when Tom’s strategy changed to going long. It involves managing money for George Soros, and some of Tom’s early long winners.
This dovetails into how Tom got into biotech, which is where he’s spending lots of time today. Tom tells us about his introduction into gene therapy, then successes with the company Intrexon. He talks us through some small companies he’s been a part of that have already sold for huge paydays…for instance, one purchased by Novartis for $9B.
This is a must-listen for any short-sellers, market historians, private investors, and biotech investors. And Tom’s most memorable trade is a doozy. This one involves buying puts for a hundred and something thousand dollars…which he sold for $13M.
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Links from the Episode:
- 0:50 – Welcome and introduction to Tom
- 1:23 – A look at the early part of his career
- 6:17 – Transition into being a short seller
- 9:20 – Why shorting was so much easier in the 80’s and 90’s
- 14:00 – The response to their strategy in the beginning
- 17:44 – Stand out shorts and the work that went into them
- 28:27 – Pushback on betting against fraudsters
- 31:56 – Involvement with Stratton Oakmont (The Wolf of Wall Street)
- 36:06 – Another short-selling experience with a real estate group
- 40:00 – Transition to long investing
- 44:08 – The importance of where you get your ideas
- 46:57 – Tom’s global investment strategy
- 52:45 – Tom’s interest in healthcare
- 1:06:31 – Tom’s look toward the future
- 1:13:38 – Behavioral underreactions
- 1:13:44 – From Alchemy To Ipo: The Business Of Biotechnology – Robbins-roth
- 1:16:56 – Important – find the single best source of information
- 1:20:50 – Most memorable investment
- 1:23:42 – Tom’s plan to raise his profile
Transcript of Episode 125:
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 the 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 what I expect to be an incredibly entertaining and fun episode for you. Our guest helped build one of the world’s first multibillion-dollar short selling hedge funds at Feshbach Partners in the 1980s, where he got to expose dozens of stock frauds. And then became an early stage investor going along on lots of stocks, and private companies, and health food, and satellite TV’s. Now he runs White Rock Capital family office, where he’s spending a lot of time thinking about biotech. We’re thrilled to have him on the show welcome Tom Barton.
Tom: Thank you, thanks for having me on.
Meb: So Tom, I figured we’d use your career arc as jumping off points to talk about a few different topics that are near and dear to your heart, including short selling, and private investing and everything else. But maybe bring us back to the beginning, I think you are a Vandy guy, I’m actually going to be in Nashville next week. So podcast listeners come on out to Topgolf I’m giving a talk there. But walk us through it. You did your MBA I believe, were you a short seller out of the womb? How did you get into this world?
Tom: After I graduated from Vanderbilt in the late 70s, the first job I took was in New York City for W.R. Grace. Back then Grace was actually a really great diversified conglomerate. And I worked directly for staff that was right under Peter Grace who was the CEO, chairman, he was basically pretty much a dictator of W.R. Grace. And I did all the confidential work, so if they were gonna acquire anything, divest anything, make any major changes within the company, they would come to our staff. So no, I didn’t get to make any great strategic decisions, but I had to do all the work, and I had to do all the financial work, and the marketing strategic kind of analysis, for literally hundreds of companies.
Because if you looked at Grace back in those days, first of all, they were an industrial company, and they were in things like Cryovac which is the plastic wrap that goes over all the steaks. And they own 90% of so many other markets, and they had dominant shares in industrial natural gas kind of industries. And at that time, you weren’t getting a very big multiple. So they started diversifying. They started buying all these consumer product companies, and restaurant chains, and sporting good stores. Most of these don’t exist anymore or they were sold off, so I had to do all the analysis. So pretty much I worked 19 hours a day for about three years, and kind of learned every industry.
That was like an excellent place to start, excellent place. But during the process, it became very funny because I was reasonably close to Peter Grace, and he said to me one day he said, “Hi Barton” he says, “You’re the only guy who works for me that will come back and tell me how crappy everything is.” And I go I don’t know, I go out there and I look at the stuff. And look I’m pretty young back then I’m like 25, and I go it’s pretty obvious this is like really in a lot of trouble.
He says, “Well this is what I’m gonna do, I’m gonna send you to 20 cities over the next 20 years, and you can clean up our garbage stuff. Every time we have a problem I’m gonna send you to the next place.” And I went home that night, and I went “That does not sound like a good job at all.” So that was pretty much the end of my W.R. Grace days, I just could not… I couldn’t imagine going to 20 cities. You can imagine the cities they would have sent me to also. So I left. I went to Dallas started a firm with another guy it was a manufacturing firm, it turned out we ended up building most of the fixtures for Blockbuster video. If you remember the kind of crazy fixtures they had in there, we just kind of morphed into a very unusual kind of manufacturing business. specialised on that.
Somewhere in the process, a European company came in and bought me out, and I got my first pretty much tall capital. It was a decent amount of money back then, but it’s not huge, but it was certainly enough to let me be independent if I wanted. And after that which is we’re talking a period of… this whole thing from Grace, let’s say 1977 to ’80 then ’80 to ’83. In ’83, I was done with that segment of my life and I knew how to run companies, I knew how to analyse companies.
I understood about balance sheet, P&L, cash flow, but I also understood what it was like to actually be in a plant and have to count inventory and actually collect receivables. So I got this really great combination of understanding all these industries, then actually having to work in one, where I actually had to build a company, make payroll and all those kind of things. So it was a really good combination, and then my whole life changed and I started become a short seller in 1983.
Meb: By the way, do you know that there’s still a Blockbuster video in Alaska? I think there’s only one left I can’t remember why there’s one in Anchorage, but it’s probably like a museum at this point.
Tom: You know, a really good friend of mine back then who I met because of the quality of data we came up with was Alan Abelson, who was editor for “Barron’s”. So I still think he’s the single best writer, and the most accurate guy that I’ve ever dealt with in the press. And he was talking about the collapse of Blockbuster video about 10 years before it finally collapsed. And you know, when Netflix first came out, they’re we’re gonna put them away, It took a long time. But you know, it was a really interesting company and they had a niche, they just didn’t get out of it fast enough.
Meb: We talk a lot about that with the high expensive fee mutual funds long-only world that’s kind of the closet indexers at some point. I think all those are gonna go the way of the Dodo, but we haven’t… don’t know when that’s gonna happen. We often talk about is there gonna be a Blockbuster-Netflix moment with those, or is it just gonna be a generational transfer? I think it’s probably the latter. But anyway off topic all right, so you’ve got some pretty good operational experience and pretty good practical experience analysing companies.
Did you just kind of wake up one day and say you know, I feel grumpy I didn’t have any coffee, I’m gonna start looking into some of these crappy companies and betting on them to go down? What was kind of the transition? What was the next phase?
Tom: Interesting enough when I was younger, I never woke up grumpy, so that was good.
Meb: I wake up grumpy every single day. I crawl out of a coffin, my dog licks me in the face, and I crawl to the coffee machine. I always laugh at people talking about their very intentional mornings where they do a lot of meditation, and I just don’t have that gene. When my genome gets sequenced we’ll find I have the grumpy morning coffee Gene, okay so…
Tom: As you get older it’s gonna get worse, I’ll just tell you that. So in 83, I went to work for a very wealthy Dallas family, and they had all these investments. But they only had one investment that just was printing money every year, it was from a guy that was actually right next door to us. This guy Rusty Rose, and I went over and I met Rusty for the first time, and anyone who’s older will know about Rusty, anyone who’s younger would not. But Rusty was one of the original fraud short sellers and probably the best of all time.
A Stanford Harvard guy, unfortunately, he passed away a few years ago, but Rusty was so good at short selling that they actually gave him the name the mortician. And so if Rusty shorted your stock, it was going to go to zero because he didn’t mess with anything that wasn’t like really a fraud. And nothing that you would actually even cover a buck. So I went over and I met Rusty, and I knew nothing about stocks, I knew nothing about Wall Street even though I’d gone to business school. I took out a monetary policy but I didn’t waste any time on the stock market or the like.
So he explained short selling to me and I said, “Wait a minute, my best attribute is to be able to do detailed research, and to find things that are having problems, this seems perfect for me.” And back then, in particular, I felt like the number of businesses that were founded that a larger percentage failed than businesses that succeed and also is it easier to spot something that’s gonna fail than to be certain on something that’s gonna succeed. So I said this is great, I said, if you’ll find ideas, I’ll do all the research for you.
It was just right down my alley where I can make the phone calls, I could do the spreadsheets, I could read all that stuff. I have a really good… probably the best thing about me is common sense. I just have kinda like this fairly simple approach to judgement of good and evil, and I tend to get it right, so it’s just kind of the perfect place. And I just started working next to Rusty. I was in the office next to him, but Rusty would come over and say “We oughta look at this company.” And I would look at it, and I go start making calls, and I could not believe how many companies out there were 100% frauds.
Now you gotta understand this was a unique time in history, and you cannot reproduce… all your listeners, you cannot reproduce this kind of strategy again. This is something that could work in the ’80s in the early ’90s. It cannot work today, you’ll understand why. Because back then it was simple to do a fraud, you could do a fraud… and there were so many companies that were either investment banks like the , D.H. Blair, Stratton Oakmont which I’m sure most your listeners have heard of because of the “Wolf of Wall Street.” We can talk about that, I turned Stratton Oakmont over to the FBI.
But there were companies that would float these IPO’s and the whole businesses were fraud. But that was back in the day, you couldn’t even find stock symbols. I mean literally someone would give me the name of the company, I couldn’t find a stock symbol for two or three days. And it was also… there was nothing online. You couldn’t get 10K’s annual reports, quarterly reports, you couldn’t get any of those. So you had to go to a company like Disclosure, and Disclosure would actually print these documents out to you. So the only way you could ever figure anything out about a company is you’d have to get really get a hard copy read and go through.
So was a very slow process, and there was no overt sense of a public guardian. Like you know, right now someone tries to commit a financial fraud, the public is everywhere and they’re tweeting about it and the whole deal, back then total crickets. And so a guy could launch something, he could run the stock from $2 to $19, nobody even know about it. And we got very, very good at finding those, and it turned out we would find those things because we would start tracking certain investment banking houses, if you wanna call that you know. And those houses were not shy, and you know, the SEC would go in and slap them on the hand and give them a fine.
But the SEC wasn’t really refined in that area of going after frauds, and so the SEC had to actually learn the process of how to do it. And we can talk about that in a second, but the number of frauds that we ran across were enormous. And basically, we never got beat, so we could do 100 shorts, and we would win 100 times. Now, it’s not that we wouldn’t suffer some pain in the process, but we never got beat, we were never short, and also we were not shorting overvalued companies at all.
So just to give you an example back then, there was a company that was called Instant Hot Water, and Instant Hot Water the claims were very, very simple. It doesn’t even matter whether these claims were accurate, but just understand the level of the story here. The claims were that everybody knows that hot water molecules stand up cold water molecules sit down. So this guy claimed that he had an instrument or basically an electrical motor that he could put wires into water, and he could flip a switch and molecules would stand up, so he called it Instant Hot Water. And that was a public company, and that actually traded, well obviously that was just a total fraud.
There’s another company called S. Taylor which was Snooki Taylor which is a company that claimed that you could go down the black sand beaches, and you know, you see the sparkling on the beaches well that’s silica, that’s not gold. But they would tell people it was gold and they drag these things down along the beach. And at the end of capturing black sand, they would throw it around, they’d open up the bottom, and sure enough gold would come out of the bottom. Well, it’s pretty obvious how they did that right, they stuck gold in the bottom.
So the earliest days, the first 200 or 250 or 300, or 400 companies, we did, were all like that. They were just completely made up garbage companies. And it turned out that we got very good at finding them, we got very good at doing the research on them. We actually wrote a book on how to do research on frauds. Now we didn’t publish it. I still have it my office. It was like 200 something pages. So an analyst who come in and figure out how you would actually find a fraud, investigate a fraud and the like. But we got so good at it that we would just find a fraud, we call the SEC. I had several guys at the SEC in Washington, and I would pass these frauds along to them.
I’d give them all the work, and for years they really couldn’t quite figure out what to do with them. But by about 1986, ’87, they started really figuring it out, and so you could present them the data, it was always black and white, and within a fairly short period, they’d go investigate them. And then it would take a little bit longer to close them down. So this became an incredible business. I think I started with a million and in four years, I’d turned it into 15. And I wasn’t really pressing it hard, but it’s just like we were just never gonna get beat.
Meb: And so like the process was you would put on a short say SEC these guys are clearly a bunch of fraudsters. It reminds me of an old phrase my grandmother would use which is using some elbow grease, so actually doing some like hard work meaning and kind of value-added digging around, a little harder today with a disinfectant on the Internet. And so you would put on a short and most of these I assume were terminals. Like they would essentially go to zero or go away, what was then the process? So you did this for a little while, you built up this 15 million capital and did people start to wake up to this at all? What was kind of progress?
Tom: Even in the early days when I really was… I mean I was pretty happy with that kind of result. I then merged in with Feshbach Brothers. Now Feshbach Brothers was still a small firm. It only had about $100 million in capital at the time, but there were three brothers there, and the three brothers were absolutely brilliant, but no formal education at all, zero formal education. They were really, really smart guys. And we started swapping ideas because they knew Rusty Rose, and we just got along really well, and we merged our firms together.
And then we raised a little bit of money. I mean basically, we wouldn’t have to do anything except accept money coming in because our returns were crazy. My return each year was always over 80%. This went for gosh I don’t know, nine years or so something like this. I mean our returns were phenomenal. And by the time we got to 1990, we had a couple billion dollars, and I believe from the data that I’ve read, and I’ve never tried to substantiate it, the entire hedge fund industry was about 10 billion. So at one time, we were 15 to 25% of the entire hedge fund industry, that’s how early we were in the process.
So we built up to a couple hundred people, but it just a completely different time because we had 26 people in the accounting department. We had to write the original software that’s now Advent which is used by almost every hedge fund that does any form of shorting. We had to write that software, we actually wrote that at Feshbach Brothers. And that became what is now Advent which virtually everybody uses. We should’ve kept that company because there was really no way to handle large numbers shorts, large number accounts, and the like.
We helped Merrill set up their short selling box, which basically for your listeners if you short a stock you have to go borrow it. No one really knew how to do that in mass. We helped Merrill Lynch do that. So we were very instrumental in developing the short selling industry into something… well developing into industry and then having systems in place so you could do it in large amounts of dollars. We were early about that.
But I think what then naturally developed besides the fact that we had a large amount of capital, we also were lucky to run… I mean we had the crash in ’87 which I never vote for a crash. But if there’s gonna be a crash it might as well be short, so I would prefer the world not crash, I’d prefer to make it on the long side. So I am never looking for bad things to happen. I remember we were short, I think it was Jet Blue at the time or no, it was Value Jet. And it was a terrible, terrible airline, and they had all kind of maintenance issues, and they were buying planes that were just for $2 million, and it was nothing but trouble.
And I remember the company went away, but they had to have a plane crash in the Everglades, just a sickening feeling to end up making money on people doing poorly. But generally, we weren’t on the Value Jet side were more on just terrible, terrible businesses.
Meb: I think a lot of people listening to this, that’s kind of amazing too you know, the ’80s and ’90s rip-roaring bull market. And to think that in a time when U.S. stocks, in general, were performing so well, that there were still these sort of inefficiencies and frauds out there that you could find opportunities despite the huge headwinds of an upmarket is pretty amazing. Are there any other like kind of stories that come to mind you know, as you guys were doing all this research. Are there any ones that stand out?
Tom: There’s a few that I think are really, really interesting when you start doing frauds of businesses that don’t exist that’s one thing, but when you start doing fraud of businesses that exist, some people might claim that Tesla is a fraud, I don’t think it’s a fraud. But Enron would be an example of a real business, that was a real business that really didn’t exist right. When you start off doing complete scams like Instant Hot Water, and even the very famous ZZZ Best that we turned over to the SEC, which was Barry Minkow, he went to jail. We could talk about that, you know, the Drexel Burnham.
Meb: What was that business? It’s great name.
Tim: Well ZZZZ Best was probably the highest profile fraud back in the ’80s. It was a Drexel Burnham deal, and they basically claimed that they were going to all these buildings and they would do restoration after fires. And what they would actually do is… and they tricked everybody, including Drexel, but they didn’t trick us for one minute, was that they would go out to these buildings that were under construction and rehab and the like, and they would hang up their helmets, their construction helmets and their T-shirts, and they’d bring in the bankers and people like that. And they’d see all their stuff laying around, and then they would leave, and then they would take all their stuff out.
You would think it would be pretty easy to figure out that there weren’t that many big fires. I remember when the MGM caught fire a long time ago in Vegas. That was like a major story. So I remember calling the people at MGM and go your carpet restoration how big was that? Thinking, wow I mean that’s an entire hotel almost. It was like $3 million. These guys were claiming they had carpet restoration business of $10 and $15 million. It was just insane you know, and it was easy to track because you figure out the towns that they were in, then you call the Fire Department, the Fire Department would say there were no fires. But they were fooling Drexel Burnham, and they were fooling the public.
And so the SEC raided them. They ended up… Justice Department went after Barry Minkow who’s gone to jail, come out of jail, gone to jail, come out of jail, I think he still might be in jail. But real businesses like that became very, very interesting. And then my first biotech… wasn’t really biotech it was a pharma business was one in my own backyard in Dallas, which was probably the most fun I ever had on any company. Which was called Carrington Labs. And Carrington Labs claimed in the ’80s that they had a cure for HIV, well basically a cure for AIDS.
None of us even knew what AIDS were, so we had to do all this research to even figure out what AIDS was. And then we had to do a lot of work on Carrington Labs even though they claimed that they were curing AIDS with aloe vera. But I remember the funniest story was they had one doctor in Fort Worth, and he was curing all these people. And I remember calling him and by that time I knew what the symptoms were of AIDS, and saying look, if you had these kinds of symptoms, these symptoms, he would go, “If you had those symptoms you definitely have AIDS.” And it’s like, “I’m curing and all these people of AIDS.”
And so he would ultimately give you names of people that he was curing, and you would go follow these people, and you would find out that they were passing away. So it’s a tragic story, but you’re trying to figure out maybe this company really has a cure for something that is very public… I mean the profile of AIDS back in the ’80s it was so high right. And then you know, ultimately we found these people are passed away, we go back to him go, “Yeah, well these people have passed away.” And he’ll go “Yeah, I cured them, and then they go back and catch it again.”
It was such a joke, but what happened from Carrington Labs is that they were huge money guys, one of the second guys at one of Ross Perot’s companies EDS, second or third guy. I think it was actually the third employee, he was promoting all of this stuff. So you know, they called the SEC on us, and the SEC did nothing because they said they were trying to run a real company. But then there was a huge congressional review, and the congressional review was about us at Feshbach Brothers. And there’s a book out, there’s like about a 400-page book about this congressional review of short sellers, because all short sellers back then had to be criminal, right? I mean we were making up these stories about these great companies.
And I remember… and they asked me to come and testify I would not go, because they had like six companies testifying in front of Congress, and all six of them were complete frauds. But it didn’t matter to Congress. They didn’t have the slightest idea. They just had one congressman who wanted to go after short sellers. And so I remember the funniest thing was they said that me, Tom Barton constantly use the name Joe Barton making calls, and Joe Barton is my partner, he’s also my brother right. And so they wanted to say that I used the name Joe Barton, and we had a congressman in Texas Joe Barton. So they said I was impersonating a congressman. They didn’t even know I had a brother named Joe.
And so Congress is up there talking about how I’m using this name of Joe Barton, and it was really kind of a hilarious thing but they made a big deal out of it. And they were gonna try to go after everybody and bring criminal things, and it basically went away. But Carrington was really funny, and they were just… I don’t know how many of these names you wanna go through? I remember… here’s a very simple one. We were short Home Shopping Network back then, and of course, HSN has survived.
But back then we were very concerned because their inventory numbers were huge. They would carry 90 days and 120 days and 160 days of inventory, and we figured out the inventory that they were carrying wasn’t any good. Because Home Shopping doesn’t carry inventory right. They’re supposed to bring inventory, put it on the air, it goes away. If it doesn’t go away, they put it on the air one more day and then it hopefully goes away. Then they discount it. You don’t carry inventory for Home Shopping Network, but they were carrying 160 days, so obviously they were buying a lot of bad stuff.
And Home Shopping Network almost went away, as a matter of fact, I’m not sure it may have actually filed bankruptcy and come back out, I don’t recall. But this is the level of research… but I’ll give you one more story on the short side and the level of research it took and how we actually use that today. Because this is I think is… it’s an interesting story and I referred to a recently in “Barron’s “interview that we did, but I gave a small snippet. But we’re short of a company Endo-lase, and Endo-lase had a laser that was one of the first medical device lasers, and it was about a million bucks which means only a few hospitals back in the ’80s could even afford a million dollar laser.
And their sales were enormous, but their accounts receivable were over a year. Which you don’t have to be a genius to know there’s some problem there. So we called the company. We said, “Hey your accounts receivable are over a year what’s going on?” It happened to be a New York company right up here on Columbus Circle, and the guy there who… the end of the story is he ended up fleeing the country. He said, “Look, we sell them to the hospitals. It takes them a long time to pay for them, but our cost of capital is so low that lets us sell them, we collect them over a year or two years. It doesn’t really matter, it’s basically financing.” And we said, “Okay,” and hung up and I didn’t believe the story.
So I told my analyst, “Identify every hospital in the United States that can afford a million dollar laser.” There were 200 and something. We called all 200, all of them. We said, “Hey you ever bought this laser?” “Nope, never bought the laser. Nope, never bought the laser. Never bought laser.” So we called the company back up, “Hey 200 hospitals, nobody bought the laser.” “Oh yeah, we sold them to all these hospitals. Come up and you can look at our books.” Okay so I go up and I have a guy go with me because I think that possibly it’s a mob-related deal they’re gonna kill me. And a lot of things we shorted were a mob-related, and we can talk about that briefly in a second.
But when I looked at the books and sure enough their accounts receivable for all these hospitals that we had called. And he said, “See we sold them all.” I made him go back call all the hospitals, and sure enough none of them had bought it. So they were just making it up. I think Arthur Andersen was the auditor back then, for people who remember the name, Arthur Andersen. But it didn’t matter could be an Arthur Andersen, Price Waterhouse, it could have been any of those guys. They were all being taken by these kinds of guys.
So we had to do a lot of work, and so we basically figured out that they were made by Messerschmitt, the German company. We talked to Messerschmitt, we said, “How did the lasers get here?” “The lasers came by boat.” “When do they get here?” “They come here on a Thursday, we ship them so and so, we get them, they’re paying us for the lasers. We really like Endo-lase.” So then we have to call the dock in New Jersey, and we talk to a guy there and he says “Hey these lasers are coming in.” He says “You’re lucky because this laser has its own number. If it’s tennis shoes I cannot tell you what’s coming in and where, but this laser I can tell you exactly when they come in. We get them every Thursday, third Thursday of the month.”
I said, “That’s great.” So we had a private investigator, he went down watched the truck pick up these lasers and they took these lasers, and they’re storing them in his grandmother’s house in the garage. Well, you can imagine now that we have that answer and that story what do you think the SEC is gonna do? Do you think it’s hard to short a stock? Remember there is no uptick rule then, you think it’s hard to short the stock? Do you think you worried about shorting the stock? No. So you just call the SEC and go, “Okay, this is where the lasers are coming in. Go over there the address, open up the garage, that’s where all the lasers are.” And that’s kind of what happened and the guy who ran it, Michael Clinger, he skipped the country and he went to Israel, and he’s had some other run-ins with the law since then.
But this is the kind of work that you’ve gotta do, you just can’t look at the top. You can look at the top and go one-year of accounts receivable, but that’s not the way you’re going to have a certainty of 100% that you got it right. Those are only kind of shorts I do, so I would not be the guy that you’d wanna call on Tesla. I’ll give you an opinion on it, but I’m not the guy that you will call on Tesla.
Meb: Meanwhile that grandma had an amazing garage sale selling lasers to the whole neighbourhood.
Tom: Actually she didn’t collect for him either. I think they were just hauled away and returned.
Meb: So we talked about lasers, it seems like betting against the mob would be kind of a questionable target for your own personal life expectancy. I mean how many times would these companies push back? Would you ever get any threats? Being a short seller is so hard even today where half of the country thinks short selling is un-American. But how often would the companies react kind of aggressively or angrily or anything else, anything come to mind?
Tom: Yeah, first of all, let me tell you what is un-American, promoting companies with stories that are false, whether you’re long or short, that is un-American. Trying to figure out whether people are telling the truth, that’s very American okay. Risking your capital is very American. Very un-American, starting rumours about companies that aren’t true to drive it down or drive it up, very un-American okay. So I just wanna clear that because you can’t put all short sellers in the same category because it’s not fair, it be like putting all people in the same category.
There are terrible short sellers out there that just start rumours and then do these hit and runs, and I punch those guys in the nose okay. I hate those guys, but there are other guys who do really detailed work and they help the market.
Look in the old days these companies that were run by mob contacts you know, New Jersey, New York, Salt Lake City, Salt Lake City was huge, Newport Beach, some great parts of the country, West Palm. The places you would expect maybe a little bit more mob involvement, when something went bad they used to beat up each other, they used to go get the guy who do the promote and beat him up. And there were cases we heard about that, where guys were… the big promoter the guy from the SEC would say to me “Yeah he got beat up” and the like.
I never was really that worried about it because to them it’s just… or to guys like the D.H. Blair, it’s a lot better just to go to the next one. They probably made money on it anyway. Okay, let’s go do another one, it’s better than just bringing more and more attention to yourself. So it wasn’t much of a concern, but it became a little bit more concern in the early ’90s, and I had really good security guy. I started bouncing things off him, he was really good. He was Ross Perot’s guy. As you know about Ross Perot, Ross Perot knew something about security, and I would bounce these things off he’d go “Forget it, forget it, forget it, forget it, forget it.” Then I had one. He’d go “No, that’s a real one.”
And so after that I just decided you know, I’d made enough money doing this and also what advantage is there to be public about all this stuff? So I just pretty much went underground and since ’93, I’m almost unheard of. And that’s pretty much the reason, it wasn’t really the threat from them, it was just when you get a certain level of publicity you get a certain issue that goes with it, right. So I just decided the publicity was not that good, but really in the late ’80s in the ’90s, I couldn’t walk anywhere, I could not go to a ski slope without people stopping me, I was that well recognised.
You know, in New York I couldn’t go anywhere, and I had all the speaking engagements and stuff. But you know, the great thing is that’s before Google, so if you go back and Google me you don’t find that much stuff. So you know, I went underground in ’93. Now I’ll tell you this, it’s not really advantageous to business, it’s a lot better to business if you have a high profile because everybody’s calling you seeing deals. Then all of a sudden you go underground that’s not great for business.
Meb: Well, I joked with your earlier that you have probably my favourite website I’ve seen in the past decade which it has I think… it looks kind of like Berkshire. It has like two lines of… all white page with two lines a black type, so my favourite. You know, you mentioned earlier a quick reference to Stratton Oakmont and I think that name will probably ring a bell with a lot of our listeners. Maybe talk to us a little bit about your experience and an involvement with that shop?
Tom: That whole movie “Wolf of Wall Street.” I saw it and I laughed the whole time okay. It’s a very entertaining movie that is not the way the story went at all. I mean the story was very, very simple of a firm that was running stocks up, selling the stock they owned, and instantly the stock collapsing. It was a very simple pump and dump, very similar to what another 20 firms were doing at the time, and it became very obvious after doing a lot of work, a lot of work, similar to the kind of work I’ve described before, that these guys just wouldn’t file 13D so they could own 80% or 90% of the stock. It would look like there was a lot out the float, they could trade it back and forth, and then once you’ve got a stock to a certain level… Actually today it’s called momentum investing when it gets to a certain level then everybody wants to own it, and then they sell and everybody is held holding the bag, right.
Stratton Oakmont was nothing more than that, was just another one that was pumping out crappy deals. We knew about them. We turned it into the SEC. Ultimately had discussions with the FBI over it, and then they were raided and that was it.
It wasn’t any more exciting, sexy, then any other story except somebody decide to do a movie, and if they said, “Well this guy didn’t file with 13D, which means you own more than 5% and he owned 90% and therefore they could control the stock, that aren’t much of a movie right. I saw the movie. I was just in hysterics because you know, I’m not aware any of that stuff happened. Sinking a boat, and crashing a car like that, I’m not aware of any of that.
Meb: You need a little Hollywood to spice it up, there’s actually a personal angle to this with me where I live in Manhattan Beach California. And back in the day when I was in my late 20s, had a couple roommates we were… maybe early 30s can’t remember at this point. We were trying to get a new nice apartment and had put in a bid and the landlord accepted, and then called us back a day or two later and said, “Actually I’m gonna rent out someone else.” We said what are you talking about? He said, “Yes, but I’m renting it out to this guy who his life is gonna be in a movie based on… and he’s gonna be portrayed by Leonardo DiCaprio.” And I said, “Oh my God.” So I lost an apartment to him. He’s been on my doghouse shit-list ever since regardless of the bucket shop he ran. I’m just mad because we lost the apartment.
Tom: I’ll tell you a really funny story, to me it was very funny at the time talking about the mob and stuff. I came to New York. The SEC asked me to come to New York and speak to the district attorney in Manhattan which I was more than happy to do. And I came and I get in a room and he comes in, very recognisable okay, and there are three or four SEC guys there, and they’re very interested in this one particular firm. So I start telling them all about it and they’re all real interested. All of a sudden, the attorney gets up and he goes “I gotta go,” and I go “What do you mean you gotta go? We’re only like 30 minutes into thing?” He goes “Hey we caught a guy at the post office opening up letters and he stole recently four subway tokens, and that’s a felony.”
He actually left this meeting where we’re talking about all these mob guys rigging these stocks to go get a guy who had stolen four subway tokens. I thought at that time boy, I’m not really sure how you rank these in terms of crime, but it was kind of a crazy thing. It’s like I thought… I looked around and said “I don’t think my story is that important but we’re talking about…” subway tokens back then they were probably 25 cents it was like a dollar maybe $2. And they had taken off so that’s my mob thing.
There was another story that was real funny too in a certain sense. It was a company Koger Equity and Koger Property, I think they were the largest class B building owners in the country or certainly one of them. And the guy RR Koger was just really well known in Florida. And we got a call that “Hey you need to look at the transfer of these assets because they’re transferring assets back and forth.” And so what they were doing is you know, real estate prices were starting to fall in Florida, surprising okay. There’s a period that they fall and a period they rise, and what Koger Equity and Koger Property were doing is they were selling properties to each other, but Koger Properties would buy one for 10 million then sell it to Koger Equity for 25. Then Koger Equity would have bought a property for 30 million and sell it back to the property for 50 million.
So they were trading properties back and forth and each time they would make that trade they book a profit right. And the value of their assets would go up. So we figured it out. We turned it into the regulators. They raided the companies, companies went to zero. About a year and a half later, I get a call from an attorney in New York he says, “We would like…” and it became known that I was the one who turned him over. It was either in the press or something of the like, or they got it from the SEC I don’t know. I’m not certain.
So the attorney calls me he says, “We represent RR Koger. We would like to come down and interview you. I said, you do not wanna come down and interview me, he goes “No we do.” I said, “No, you don’t you’re gonna waste my time would be the biggest mistake in your life.” He goes “No, we do,” and so I try to block it about four different times and finally it got scheduled. So I was gonna have to do a deposition in Dallas over these companies that went to zero. So at that time, the attorney that’s gonna represent me was an ex-SEC guy, really great guy, really funny guy Tom Vonstein [SP] was a great guy, and super smart.
So he says, “Okay Barton,” he says,” You know, you gotta be prepared for this.” I said, “I don’t have to be prepared. Let’s just meet with them.” They come down to Dallas, and it was the most amazing thing because when the door opened five attorneys came in, they were all in their late 50s, full silver hair, three-piece suit. It’s 100 degrees in Dallas Texas at the time. These guys looks like the TV show. First guy comes he’s more powerful, then the second guy comes in, and he is more powerful, the third guy comes in, it’s that kind of deal. And they’ve got these briefcases that probably cost $10,000 a piece and they sit down.
I go in, in a t-shirt, shorts, and tennis shoes, and no socks okay, and I go in and I sit down at the table, and I put my feet up on the table right in front of them okay. And they’re very serious, and I’m laughing with Vonstein and they’re gonna record it, and they’ve got the cameras there, and the stenographer. And incidentally, they had the judge on the line too because they thought that I might become a problem, they were going to use the judge to force me to answer questions about it right.
So we sit there and they go, “Okay, we’re gonna start this thing, judge you ready?” “Yes, I’m ready.” And roll the cameras and take the notes and they start the thing. And the guy says to me… he goes, “Please state your name,” and I go, “I’m not giving you my damn name. You don’t need my name you know exactly who I am. But I just wanna tell you before we get started…” Now I’ve been doing this 10 years, so I had a reputation okay. I said, “I just wanna tell you before we get started, your client is the number one white collar criminal I’ve ever run up against.” At that point, the lead attorney says, “Hold on just a second please.” And all five of them get out, and all five come back in they go “Mr. Barton thank you for your time that’s the end of the interview.” That was the whole thing And do you know what they were trying to do? They were trying to show that if I could figure it out by looking at public documents, that anyone could figure it out, so therefore it was not a fraud.
Meb: You clearly had this niche, you were successful in finding these frauds. At some point you also started investing on the long side too. I know you were managing money for Soros at some point. Was there a transition? Was it something you just started doing both at the same time?
Tom: No, at the end of literally 1990, short selling in this form and fashion was over. It’s just that so many of these houses that were pushing these frauds were gone. Remember the S&L and the bank crisis came up? We were sure short every S&L that walked because we just were… we were short almost all the banks because they had 10 times their equity in real estate and real estate was all collapsing. And the short businesses I had just described over the last 45 minutes was over, so D.H. Blair was gone. All these slimy brokerage firms were gone. The SEC was on top of it, and literally, we couldn’t find hardly any more of these. They were no more Instant Hot Waters.
And you know finding a Koger Equity, Koger Properties that’s a tough gig okay. It’s tough to do the work on that and find those that are that big. It’s so much easier to find a company that really doesn’t exist, it has a big stock price. So it was over, and in 1990 we had a great year at Feshbach back. In ’91, we did not have a good year because all the shorts were going up. And most of the… not most but a good amount of our money wanted us to stay short and we just couldn’t stay short. And so we actually had liquidations in ’91. And we actually told our clients who said, “Look we’ve gotta go long because we can’t do this anymore. We’re just telling you it’s over. Momentum investing is now hot. If you’re short a company, short squeeze is really important.” They were just starting to list stocks. I’m not sure they were listing there, but people knew what the short interest was.
At some point, they start they started publishing short interest. And so really the source of shorts was gone, so Feshbach Brothers had to completely morph and we were just not going to morph that firm. So my brother Joe and I, we left and we set up our own kind of family office in ’93. However, we didn’t change offices because we were always in Dallas. The Feshbach Brothers had headquarters in Palo Alto. We were always in Dallas, so we didn’t have to do anything but change the name on the door.
I remember walking in and my secretary was there, she’s been with me for 35 years, and I said, “What are we gonna do? What are gonna call the firm?” And she says, “Well you know, how about White Rock Capital because we’re near White Rock Lake?” I go, “That’s great,” and that’s how White Rock Capital got started. It started in ’93, and the first thing we did was we ended up calling a great contact we had at the Soros, and Soros immediately gave us money and so we were off and running in a completely new business. That happened in ’93.
We were forced… I would have never, ever left that niche in the market if the niche was gonna continue, never left it. I also would have never left the niche of shorting S&L’s because every S&L was gonna go to zero okay. But you know, the biggest problem investors have is things change. They have an outlier situation, short selling of frauds, and they’re great at it. And then it changes and they don’t change, now to Chanos… You gotta give Jim Chanos credit because Chanos has been a short seller all his life.
And so Chanos is a go-to guy to write a big check to be short. So Chanos has had a lot of really great years when the market allows it. And then not great years if he’s short only if the market doesn’t allow it right. But you know, to his credit he made a lot of money, and he stayed there, but I was never interested in shorting overpriced stocks. I don’t want to really make a living shorting Tesla. I don’t.
Meb: It’s hard.
Tom: Well it’s not that it’s just hard, but I’m a black and white guy. If I don’t have the answer, I pass. That’s a critical thing. Because if somebody say short IBM, I go I cannot get my arms around IBM. I can’t do it.
Meb: I think that’s a good lesson because so many investors, they wanna have an opinion on everything, and we’re always telling investors say look there’s tens of thousands securities around the world, you don’t have to have an opinion on Tesla or bitcoin or whatever it is. You can just put it in the too hard pile and move on to something that’s a lot simpler and clearer. But investors because of the news flow or just the drama and excitement of a lot of these stories and obviously Tesla, Tesla has it all it’s an exciting story, but we always tell people it’s like you just pass. You don’t have to have an opinion on every single investment.
Tom: Well you know, the other thing is you’ve gotta figure out where you’re gonna get your ideas from. Now we figured out at a early, early stage the best place to get ideas is from retail brokers, not institutional brokers, not Wall Street research, not TV, not the “Wall Street Journal,” great sources, not for us. Why retail broker? Because a retail brokerage generally has as his customer a CEO who runs a real company. So he’s actually got the best sources because he’s probably… some cases you can find a retail broker that has high-net-worth clients, those clients are running businesses. And those businesses by talking to those guys are the very best sources.
So I love when I run across a doctor, and a doctor says to me, “What do you think about so and so?” And I go. “I don’t know, you’re one of the leading oncologists in the world. What do you think about all these companies? They’re oncology gene therapy companies right.” And so almost all of the investors that are out there have access to people that are geniuses and leaders in their field. And so we actually had to train in the earliest days retail brokers to say, “Hey when you’re talking to so and so about their business how about asking them, are there any frauds out there?” And that’s how we started getting a lot of frauds.
And so you don’t have to be an expert on everything, but even more so, you have to decide where you’re gonna get your ideas from and chasing things like Bitcoin or others, These are kind of momentum investors. I don’t know a lot of people that are good at it, some are phenomenal at it. There are some traders that I just am amazed every time, they’ll be the guys who own gold from 200 to 1,600. Or they’ll be the guys who own Bitcoin because they’re really early in the cycle, and they buy it right, and they sell it right. They’re great traders, but I can tell you or your listeners if you have 100 million listeners, they’re going to be 10 of the 100 million that are great traders. The rest of the people have to go based upon detail, based upon business fundamentals, and based upon hopefully being in a market that allows them to win. Some markets will not allow you to win on the upside or downside, there just periods like that right.
Meb: You mentioned how it’s gotten harder in the U.S. and the game has shifted a little bit which, by the way, is I think such a great lesson to investors too where you had so many funds in this past cycle that knocked the ball out of the park in ’08 based on one trade, but after that happened have tried to kind of replicate that. I think it was hard for a lot of people to say okay well that was the one trade and we now gotta move on. It’s not gonna happen again. But I wonder how much of the short selling if there’s gonna be Tom Barton in China, or India, or Brazil, where probably a lot of these shenanigans are still going on, and that kind of value-added research still works in some of these far-flung locales. I don’t know. Have you ever looked beyond offshore at all or you stick mainly to the U.S.?
Tim: Now, Canadian I will short some Canadian companies traded in the U.S. and I had… back in the days when I worked, the Ontario Security Commission could not even talk to the U.S. SEC. And so the SEC would have questions they literally could not ask them. And a lot of work that I did basically helped them write a treaty that allows them to swap data. They literally couldn’t even swap it back in the early days. We were short some things, we’d have to talk to the SEC Ontario Security Exchange, not to get off the subject of your question.
But no, we pretty much have stuck in the U.S. But really, what happened to us was during the process of investigating shorts, we started running across longs, okay. Because remember a lot of our sources are long guys really understand it. You know, not with total 100% frauds, but if you’re going to start doing Koger Equity, Koger Properties you’re gonna start doing even a company like Carrington Labs which it was a real company, it just wasn’t real. And if you’re gonna start doing… Any company there’s some level of fundamentals, you better start talking to the best guy in the field. Because that guy will really lead you in the right places. He’ll have the best contacts.
So in the process of investigating some shorts towards the end of the period, we ran across some really, really brilliant business owners, and that’s how we ended up with one of our first investments which was USSB which became DirecTV. USSB is 90% of what DirecTV ultimately was. They had all the programming and the like, but we were short a company that claimed that they had a satellite TV. It was actually here in New York. We actually visited the demonstration, and while people watching the TV coming on a satellite dish, a guy went upstairs and disconnected the wire from the satellite dish and the picture remained. Which pretty much told us it wasn’t coming from the satellite dish okay.
But in the process of doing the research on it, we ran across a guy who invented basically the eyewitness news trucks, the Uplink Trucks. And then we ran across USSB, and then as a result of that, we’re able to put $50 million in that, which was Soros money, and that became DirecTV. So we started to figure out hey look we can do these things on the long side. But long it’s a lot harder than frauds because frauds are x, y, z. You’ve got the answer you know that they’re sitting in the garage.
Long requires a completely different set of skills, and it requires a completely different set of judgement. And you also have to be willing if you’re gonna do well the long side pretty much at least… well let me put it to you this way. Sitting in the seat I sit, you have to be able to go to a room where 99 people still believe you’re wrong. But the other thing about being a short seller, you go into a room 100 people love it, you hate it, everyone tells you you’re wrong, you walk out you short more, because you have all the data.
So you have to be able to do that on the long side in the early days. Now if you’re trying to buy Apple Computer, you don’t have to be that kind of guy. But remember, I’m a black and white guy, and I like to have a competitive advantage. And I like to be in something that other people haven’t really thought about or at least all the dollars haven’t blown in. So even in USSB, they had tried to raise all this money from guys like ABC, CBS, Disney, I’m just throwing out names okay… NBC, Universal, all these companies, and they’d all looked at the DirecTV concept and said, “It will never work. You’ll never be able to have a picture that’s consistent enough, that’s not interrupted by storms.”
And like every single person passed, and these are people in the industry that are brilliant in their industry. And I looked at it and said, “Well there’s no way it’s not gonna work because you’ve already got the picture, you know how to do this, it’s satellite, bingo.” Actually was an easy exercise once we saw everything they had and the backup of the satellites it’s an easy exercise. So it was even back in the earliest days that I was kind of startled that the experts sometimes would miss it when it’s just sitting right in their face right.
Meb: Well, it’s funny Tom, because you know, the skill set to be short seller you almost have to have something like kind of a skew in your brain. All my good friends that are short sellers they’re brilliant, but you have to be extremely sceptical. And to flip the script to the long, there’s not a lot of investors, they can kind of do both. Because long we had a great comment that I loved, I think it was on the interview we did with Jason Calacanis where he said, “A lot of these ideas for longs if you look at this cycle in particular, and you look at Uber,” he said, “Well no one’s gonna do that because the drivers are obviously gonna rate people, or Airbnb they’re gonna get murdered.”
But then you flip the script in the phrasing that I’d love about looking at longs and these big multi-bagger potential said, what if it did work? In which case, all right what is the potential of this concept and idea? Because a lot of the longs when you’re looking for these 10, 100x baggers, unicorns, whatever that’s really where the potential is. And I think a lot of people… It’s rare to find someone who can do both, look at the short side and be sceptical and then flip the scripts to the long side. Over the past cycle, you’ve also started to get a little bit interested in health care, what was kind of the driving force there? Was a chatting with some of these brokers, where you said, man, there’s a lot of innovation going on biotech? Was it just deal flow? Was your neighbour a biotech guy? What was the interest that brought you into that sector as well?
Tom: You said the right thing when you said is there somebody who got you interested in it. So I’m always a guy trying to find an outlier situation or something that’s new, something I can get a competitive advantage on. Unfortunately, in my career as long as I’ve been around, I just should have bought Google or Apple, the obvious ones right. But my interest level is always something different. It’s like okay yeah, those are gonna work but I’m trying to look for something that’s kind of different more interesting. I don’t know why I’m like that, but I am wired like that okay.
So we did this thing with Soros for about 10 years in 1999 to 2003 and we managed money for other people during that time as well, pretty much still as a family office. And I always had a little hedge fund that I kept together during that period. And from 2003 to 2010, I’ll tell you not really that interesting for us. I mean 2001…2000 was an interesting time right because 2001 everything blew up. But 2003 to 2010 was not the most interesting time, plus I had young kids, they turned out basically to be all American Golf spectacular golfers one at Oklahoma State, at SMU, then my daughter went to Stanford and was and basically an academic all-American there.
And so from 2003 to 2010, I did a lot of kid raising, and I just didn’t find anything that was that interesting. I completely missed the 2008 mortgage collapse even though all my friends were doing it. I just didn’t understand it, I didn’t wanna set up these special accounts. Most these guys would get run over, and I just missed it. And sometimes you’re gonna something that’s obvious. I just went to the Billy Joel concert and I realised everything he wrote that was great… and hopefully, he don’t come back and yell at me for this. But he was about 20 years old by the time he was 60 he’s not writing great stuff anymore.
I think had I seen the mortgage crisis, and I’d been about 15 years younger, I probably would have been all over it, but I completely missed it… So from 2003 to 2010, I’m raising these kids, taking them around the world, playing golf tournaments. But I’m also still investing and the like, and we had some okay years during there. but it just wasn’t an exciting time, it just didn’t happen. In 2010 everything changed for me because I ran across a guy who said, “You need to start looking at gene therapy DNA because now we understand how DNA works, and the science is finally here. And we’re gonna be able to do something with DNA.”
And I just thought it was just totally fascinating, and actually, the guy who introduced me to the most is a guy who runs his crazy company Intrexon. And we should talk about Intrexon. But the guy who runs it, R.J. Kirk is the most brilliant guy I’ve ever met, and he knows every industry as if he’s the guy who invented the industry. And he knows science if he has a Ph D. in whatever it is talking about in science. Whether it is gene therapy, molecular biology, it doesn’t matter. He is a walking encyclopaedia of knowledge, never met a guy like this.
And he explained it to me and of course if you go read Steve Job’s book he says, “That the next great area is a combination of science and technology,” talking about medicine and technology. So now I’m starting to think about this okay, when they discovered radio frequency, there was nothing you could do with radio frequency 50, 60 years ago. And as a matter of fact, how the DNA they discovered, as I recall, three days before I was born back in the 50s. So I’m not a super young guy, three days before. But even though you could understand DNA or any even though you could understand radio frequencies, you didn’t have the technology to do anything with it.
So it took a long time before the iPhone came up from Morse code, took a long time to understand how to use those frequencies. In 2010, it was clear to me that now science and technology are going to work together, they are gonna be able to take DNA, gene therapy, and any other aspect of the human body, and they’re going to be able to manipulate it to cure major diseases. But also to do incredible things in non-health care. And I started looking and every place I looked, it made total sense. So for instance, I used to be national chairman for Major Gifts for cystic fibrosis, and I did that for I don’t know a long time. And fortunately CF raised a lot of money, but everybody knows what causes the CF, but they haven’t been able to correct it.
They’ve got great treatment for these kids that are afflicted, but they don’t have the cure. Well, the cure is to correct the gene, this is what will ultimately happen. And so I started looking at healthcare which I kind of knew, then I started looking at all these industries. And so if you go and you just kind of look at Intrexon, just at the top level… We’re not talking about the stock now, we’re talking about the company okay. If you look at the company, you got a company that has better DNA knowledge than any company on the planet.
But DNA knowledge across 100 different industries, so they’ll be the best at fish, they’ll be the best at the mosquito, they’ll be the best at apples to make sure the apples don’t brown. They’ll be the best at all these other industries because they’re working on them. Where if you go to a Kite or Juno or any of these other couple companies I’m a founder of, we’ll talk about in a second, if you go to theirs you have people that are specialising in CAR T but the guys who are specialising in CAR T, and they’re using gene therapy, you can use that gene therapy or the same DNA knowledge to go impact natural gas and turn it into a solid fuel.
So I looked at this and thought wow, this is going to be the biggest change in our world that we’ve ever seen. And everything that gets done is gonna be disruptive. So I just give you a little example if I come to you and I say, “Meb, I got this idea for a product better than Rogaine. And you know, you grow 25% more hair than Rogaine, and we’ve done these tests and we can show it and would you like to put money in it?” Well if you’ve got half a brain which I know you do, you’d go I’m not putting any money in that thing. I’m not going up against Rogaine. We’ll never get the shelf space, we don’t have the ad dollars blankety blank okay.
Now I come to you and I go, “Hey guess what, we figured out how to cut the gene on and off. And we figured out how to increase and decrease certain proteins, and we figured out how to change hair colour by proteins. And we now, in fact, can, give you a pill and you will grow all your hair back, all of it, and you will keep it. And if you wanted to be its natural colour, you take this pill, if you want it never to change grey, you take this pill.” Now you go, “Really?” The only question you’re asking me is, “Really?’
Meb: No, the question I’m asking you that sounds like you’re describing one of your shorts from the ’80s.
Tom: Well it does.
Meb: It’s a magic pill.
Tim: Yeah, it does okay, except that you and I know for a fact that science is going to figure out how to correct all these human issues. You know for a fact. You just don’t know when it’s gonna happen. So everybody always assumes it’s gonna happen sooner or it’s gonna happen later. And so they say sooner and they go to waste all their money leading edge, bleeding edge, they call that, or they assume it’s gonna happen later and they won’t invest in it. The point is if you can hit the right timing of it and you can start looking for great investments, you can make a lot of money.
So we started to invest in Intrexon, Intrexon-related deals, and in the process, we decided that there were a couple of indications that we could go after that no one else was really going after, and that we could fund and we could turn into real businesses. And so myself and two other guys we had this company called BioLife which became of the AveXis. We funded for $3 million, we went out for a couple million dollars, we got a license from Ohio State. We turned it into a real company, we hired real guys, we did real financing. But we put in $3 million, and we ended up selling it to Novartis this year for 9 billion. And that is for the treatment of spinal muscular atrophy.
Now we were up against Biogen, and Biogen’s partner Ionis and Biogen can create SMA but nowhere to level we can. We can do it with an IV. Ultimately with a pill probably, but we can do with an IV. And they have to do it seven lumbar punctures, and they don’t get the same results we do. So by using kind of like our contact base and putting together the right team, we were able to go build a company literally from scratch with no office, no employees. And in six years we sold it for $9 billion. We did it again, we did another company called Agilis and we did the same thing.
Now interesting enough, when we first formed AveXis, we first formed this company, we went to Intrexon and said, “Can you help us develop a drug for SMA?” And they said, “Yes” and we got a license from them. And then we determined within about six months that maybe there was an easier way to go and a faster way to go, and we were not wed to any particular company. And our CEO who’s a really… he’s a real bulldog down Ohio State, and he founded in an interesting way… we can go into if you want. But he founded and we licensed that for almost no money, it was a couple million dollars or maybe its two-and-a-half-million dollars. We paid for it.
And then we hired the right team, and we turned it into a real drug, and we treated 15 kids, and these kids are doing phenomenal. And we’re gonna treat other kids and then Novartis the bought it for 9 billion. But we started out by going to Intrexon. We built another company. There were three other people who started it up. I put the first dollars in it. Those three people are my personal friends, and they started it pretty much on the same way we started AveXis, in that, they went to Intrexon and said, “Do you have any rare orphan disease?”
Rare orphan disease for your listeners is that there aren’t a lot of people who have it, and it’s usually paediatric, so I’m not sure what the definition is. But let’s say 20,000 or 50,000 again, I forget the definition of people in the U.S. will have it. So it’s rare, “Was there another rare disease we could go after?” And Intrexon said, “You should go after FA.” And so we got a license for that, and then we built this company and decided that FA would take us too long. So we found another group in Taiwan, and we licensed a little drug for a central nervous system problem for a couple million dollars again.
And they had five years of data on kids and we took that great data to the FDA, and the FDA approved the drug with no clinical trials in the U.S. And we just sold that company to PTC for… I think their milestone we’re probably a minimum of 500 million, I think it’s closer to a 1.2 billion before royalties. But we started that, and I think we put a total of 20-something million in that. And so we’re constantly beating big pharma. The reason we’re beating big pharma is because we were early. See this is the beauty about being early because now if someone had a gene therapy program that was spectacular, you gotta really find it, and you gotta convinced them to let loose of it, or you’ve gotta convince them that you can build a great business team which our group can do.
Because you’re not gonna pick up some money for two-and-a-half million that’s gonna be worth a billion anymore because people are becoming a lot more sophisticated with the opportunities. But if you sat with big pharma three years ago, and you started talking about gene therapy, they had no one in the room who could talk about it, no one. If you talk with big pharma now, everybody in the room is trained in gene therapy. So if you get there early that really helps, so we’ve had two that were just gigantic returns. One is Novartis AveXis our costs was 64 cents, they got sold for $218 in cash. And then I think we’ll probably make 40-times on Agiles or something of the sort. And we have two more that are gonna be equally successful.
Meb: My problem was that I was way too early in gene therapy. I worked in a gene therapy lab in college and was absolutely atrocious at working in a lab. I’d spill viruses everywhere. That’s probably why I ended up in the investment space, but I can remember like it was yesterday reading Watson’s [inaudible 01:06:00] DNA book in college. I was in a Barnes and Noble, which listeners is a physical bookstore. I know most of you only buy books on Amazon now. But I remember finding that book and reading it cover to cover, standing in an aisle in Barnes and Noble for like three hours and becoming fascinated. And the thing for a lot of people is that you knew then even in late ’90s that a lot of the innovation was gonna end up taking 10, 20 years, but you’re finally starting to see a lot of the success, and it’s starting to get pretty exciting.
So as you spend your time like you’ve been doing, shorting, and private longs, and long investments, and VC-backed biotech, what’s kind of… as you look to the future, what do you think you spend most of your time in the coming years at the family office? Is it funding a lot of these innovative health care ideas? Is it something else? What’s on your brain as you look out to 2020s?
Tom: Okay, short, short-term and then a little bit further. Short term that we wanna have this company we’re invested in which will be our best thing BioSpherix I believe which is the original founder Chief Science Office of Celgene. And our BioSpherix has patents on drugs that we believe are significantly better than Celgene’s [inaudible 01:07:15]. And also we bought recently within BioSpherix an AML drug which was just mentioned in “Cell Magazine” where they believe that we actually have a cure for AML. And that would be amazing, and we will know as we treat a patient in probably in January how accurate that is. But I believe we have a company that actually could totally revolutionise Celgene on their [inaudible 00:07:41] which is their largest class of drugs and then offer a cure for AML.
If that’s the case, then this is a $50 billion company and our investment level is low. So we wanna get that to the point where that’s a total business and also a clinical success. The other thing is we’ve been doing a lot of work with another public company Ziopharm which is a totally misunderstood cancer company that trades about $3. Which I believe has the technology to completely jumps any other pharma company out there. I don’t care what anybody says. We can have 1,000 people get on the phone and tell me I’m wrong. I don’t think I’m wrong. And I think that if you’re gonna treat cancer you’ve gotta focus on solid tumours, and you’ve got to focus on fail to deliver, a drug to a patient in a timely basis at a reasonable cost, and that’s what Ziopharm does.
Ziopharm has the ability to do a generic delivery of a drug to a patient as opposed to the other current standard which is to deliver the drug by the use of a virus. So not to make it complicated for your listeners. You don’t wanna use a virus to deliver because it’s very customised to the individual. It’s a million bucks or $500,000 to do it. It’s a long time to develop it. There’s a big waiting list, and it is very dangerous. On the other hand, if you can do a non-bio application, you can go in your doctor’s office and what works for Bill works for Sally. And it can be produced in a low cost, and it isn’t nearly as toxic.
So I think we’ve been working a lot with Ziopharm, and I think that’s going to be… I never recommend to anybody that somebody should buy it, but we own in it and I think Ziopharm is a fabulous opportunity. As far as what we’re going to do in the future, I don’t have the slightest idea, like really at this point, I tell people they go “Well let’s see you did this company and that was that. You did that company and that was that. And biotech you’ve had two huge winners. You’re probably gonna have a third and a fourth. How you’re doing this?” And I kind of go, “Well, I don’t know maybe it’s just judgement, but maybe it’s just a lot of luck, and maybe it’s just being early.” And so I hadn’t figured out if we’re really good or really lucky, but people like to say you can’t do four in a row and just be lucky, right.
We’re gonna continue on this, but I would like to find some other indications that we can have a revolutionary change in a product that obsoletes the other products. So I wanna be the guy even though I’m not doing it, I wanna be the guy that has the Rogaine killer. So a guy takes a pill and grows all his hair back okay. I wanna do that because there’s so many… if you can name it, whether it’s fabric or whether it’s something you eat, or whether something you wear, or anything. If you look around your environment, every single thing in your environment can be improved with better DNA.
So that gives every opportunity. So if you can think about it whether it’s a synthetic leather, or whether it’s a heating fuel, or a fuel that goes in a car, or a cosmetic, or teeth whitener, or any of these other things, these are great opportunities. Let me tell you what is not a great opportunity which I hate relative to the DNA this whole industry. And that is making humans into robots, and this has been a thing which has scared everybody and it scares me today. I’m not gonna get involved in that aspect of going into embryos and making changes.
Now, I’m all for going into and being able to figure out if there are genes that this person is gonna have that are going to cause major diseases and the like, and making those kind of corrections. I am not for going in and deciding that they can be 6’2 instead of 6’8 that they can have an IQ of x, that they can have this or that, because I don’t particularly like that. But there are literally thousands of industry opportunities, and so I’m gonna continue to look for those, and I’m gonna try to get lucky and do some things on the public side.
Look recently… and I’ll tell you what your listeners can look for. Let me go back. We’ve owned some of these companies for five years before they worked, when they worked they were crazy okay. But yes, five years, sometimes of a little agony, and sometimes just how long is this gonna take, and it needs a little bit more money. Even if it’s just a little bit more money. Some of these things take a long time. But if your listeners can understand this, there can be a major change that obsoletes something else. And when that happens, if you can see that in the marketplace even after it’s announced, you can still make a fortune doing it even though you missed the first move.
So we finally bought the other day symbol AMRN, Amarin, and I have a friend who’s owned it for eight years, and it was because it would come out with some results on their drug where they treat about 8,000 patients to find out what it did for heart attacks. Just to make it simple because I know you like to make it simple, and the street thought that it may reduce heart attacks by 10 to 15%, it turned out it was 25%. So the stock was $3, it had a chance to get to about 50 if the results were poor. The results were great. It was $3, this is like a week and a half ago, it’s $20 today, it may be 18 right now okay.
It was $20 this morning. I owned it one day and it took off the next. After it took off, I bought a much, much larger position because they had not priced in, people going “Well I can’t buy stock that goes from 3 to 10,” I’m going yeah you can because it’s not the same company anymore.
Meb: That’s actually an interesting point. I mean I remember there was an old-school biotech book, I wanna say it’s called “From Alchemy To IPO.” And I’d love listeners if you have any updated studies on this, send them in. But there was a study where you basically bought biotech stocks post announcement. Meaning the news already came in but there was a behavioural under-reaction. Meaning it did pop, in this case, it was a huge pop. But even then, the market was underpricing the potential good news. I would love to see an updated study if any listeners have one send something over.
Tom: Well, I’ll tell you this, I would not advise people buying these… any company whether it’s biotech or not where they’re talking about something a year, or two, or three years down the road. Because it’s too damn hard to do it, and you just gotta hope that all of a sudden somebody decides to jam the stock up, and you sit there and you miss a great market right. I mean I’m at fault for owning Ziopharm instead of owning Juno and Kite. But I don’t believe in Juno and Kite even though they got bought out for a fortune, I don’t think they’re gonna work, and I don’t think they’re gonna be long-term businesses. But maybe they are gonna be a long-term businesses, or maybe these big pharmas wanted to buy them because they have a certain level of technology they can morph into another technology. I don’t know what they’re thinking, I didn’t wanna buy them.
So I own Ziopharm that’s been a $4 stock as long as you and I can remember okay. I mean this is a four-year sitting on our hands, but timing is now. And so if I was smarter I would just wait until they had an announcement or two and the stock went to eight or nine and then I could buy it, and I wouldn’t have to think about it. So the great opportunity for your listeners is that when you see these companies have a product transition, it’s not the same company as it was the day before, it’s not. It was a $3 stock because it deserved to be a $3 stock, but you can just look at it this way, if it was $3 and they didn’t know whether you were going to cure cancer, and the next day they cured cancer, it ain’t gonna trade for $3 anymore.
So you know, what generally happens if you do get this lift, and then you get the next opportunity because people can’t pay up when it was three then it’s nine, they can’t do it, okay. But then you find out days later that it was x, y, z, and days later it’s up another two times or three times. Look what happened on AveXis, AveXis had great news. We owned this thing forever. I mean five years before we get bought out. But it goes from a $3 million market cap, to a $4.5 billion market cap. Now here’s the hard part, in one day it went from a 4.5 billion to a 9 in one day. And so you don’t have to be early, but it is nice to buy it right, but you can take the latest data and you can apply it to the price.
Look they screwed up Apple all the time about that. You get all these clowns on TV going well Apple I don’t think this or that. At one time Apple by the time you subtract your cash, what was it three years ago, it’s trading for three times earnings. And people are debating whether it was something you should buy or not. Are you kidding? You know, sometimes you’ve got to look at the latest data, and the opportunity is really ahead of you. So I don’t know, I hope I just continue to be this lucky.
Meb: That’s the best advice. I love that, to all our listeners just get lucky that’s…
Tom: I wanna add one thing because if somebody said, “What is the most important thing you do?” I’ll tell you what it is, and that is this, and I learned this long time ago, it’s a very simple lesson. Was I was shorting stocks and they broke up AT&T. Now if people don’t probably know that it was AT&T then they broke it up into the Southeastern Bell, Southwest Bell, Pacific Bell, they broke it up, right. And when they broke up AT&T into the Bell companies, all these long distance discount carriers popped up. They popped up everywhere and they… all had big market caps and they all claim that they were going to be able to sell long distance discount because they were gonna buy it in bulk and they were gonna sell it out individually. And you’re gonna save all this money.
So they were going to put all the Bell companies out of business, no one would go long distance. I know it’s crazy that people used to pay for long distance calls, but listeners, we used to have to pay for long distance calls okay. So I wanted to short some of these companies because I knew that it wasn’t gonna work. I could not get the answer, no one could get the answer. So for us, that were around back then we know that there was one guy who broke up AT&T and he caught a lot of crap about it the guy was Judge Greene. And Judge Greene solely broke it up and wrote all the opinions on it.
So I’m sitting there going well how am I gonna figure this thing out? And I decide I’m gonna call Judge Greene. I don’t know I was 30-something at the time right. I picked up the phone, find out where he is, call. They switch me to him. He goes, “Hi Judge Greene.” and I’m going, “Hey, I actually got Judge Greene on the phone right.” And I talked to Judge Greene I said, “Explain to me this, can they do this? Can they do this?” “No, they can’t do that.” “Well, this guy said they can do that.” “No, they can’t do that.” “How about this guy?” “No, they can’t do that.”
The point of the matter is I didn’t go to an analyst on Wall Street to get his opinion, I went to the single best guy in the world. Now if you can find a single best guy in the world, which you can always, and they will talk to you, and they will always talk to you, you can always get the answer.
Meb: I think that’s a great piece of advice because most people are… I don’t know if lazy is the right word or scared. But most people will never make that call right because they’ll say… I can’t tell you how many times we chat with people they say “Well I emailed him. He never responded.” I say, “Well pick up the phone. You never know right.” But there’s the old cynical quote thinking about luck. I think it’s like “Luck is what happens when preparation meets opportunity.”
Tom: Sometimes you gotta to be willing to call the guy 20 times, and eventually they’ll put you through just to get rid of you, it’s weird.
Meb: You don’t call 200 hospitals, you’ll never find all the lasers in the basement.
Tom: Well, that’s true. Now I have access to those kind of people because I know how to get to them. I can understand why people who have full daytime jobs don’t have access to do it. But what they’ll do is, they’ll sub in other guys experts. So I actually like Jim Cramer, but I don’t invest in his style, but if Jim Cramer’s now my expert, I probably got a problem right. The investing public will find who they think their expert is, who’s easy to get, then they’ll tune in to hopefully if they want the real experts, they’ll just come to your podcast right.
But you know, otherwise, they’re gonna go to CNBC or they’re gonna go to Maria Bartiromo or people that are really smart, but they’re not experts right, they’re just reporters. And they believe well this guy said this and that, can’t do that. You can do it with small amounts of money, but you can’t do it with big amounts of money, and I wouldn’t do with any money. And I think that’s probably the biggest difference between us and anyone else. We will find the single best and keep working until we find that. And not based upon somebody’s opinion, but actually, there’s always one guy who’s a single best.
Meb: Tom, you’ve had a pretty amazing career, different cycles, different investments, different styles. We always start to wind down the interviews asking our guests one question which is… and we may have talked about already, what has been your most memorable investment or trade? Can be anything, it could be good it can be something you had a terrible outcome. What’s the one that really sticks out in your head as just burned, seared into your memory as the most memorable one in your career?
Tom: Well, actually I was on the streets of Florence, Italy at the time it happened. We were following this company which I would prefer not to mention that… and they’ve gotten in a lot of trouble as of the last year or so, and their stock has collapsed. But we always felt like there was no way that insurance companies were going to continue to reimburse for this, we never thought so. Because the pill was no better they were charging like $25,000 a pill, it ultimately turned out to be about 250,000 a year for something that you could take a steroid pack which is $10.
So we kept waiting for the company to have insurance companies drop them because you know, why would insurance companies reimburse for this? Because it’s totally stupid, it was off-label, so in just searching the Internet, one of my analysts call me… no, it was my brother Joe, he called he says “You’re not gonna believe this, Aetna dropped them.” I said, “Aetna dropped them?” He said, “Yeah, Aetna dropped them.” It was an hour left trading in the day. I said, “Well if Aetna dropped them, it’s on the Internet?” They go “Yeah, they put on the Internet,” Aetna did, right. And so we went out and we bought every put we could possibly buy, it was like $70 or $80 at a time. Every single put we could find because this is all we were waiting for.
At the end of the day, I think we put up maybe… all would could buy was like 100-something thousand dollars worth. That’s all we could do, because we’d literally 20 minutes to go. This is like six years ago. The next day, market opened and they said… now news was everywhere that Aetna had dropped them, and stock plummeted, and we sold those puts. And I think we turned it into 13 million. But you know what it was? We were just looking to find out. Now had I been in the U.S. I’d got off more than 100-something thousand dollars worth. I’d figured out how to do it because it was obvious it was gonna get crushed, but it was just a public site.
And I remember my trader at Goldman called me he said, “Barton,” he says “The SEC is gonna be in here, you can’t do that.” I said, “Let them come in. I read it on the Internet. You kidding? It’s on the Internet. It’s on their website.” So to me that the craziest one, and one that I smile about the most today because it was such a pain in the butt. That company, it was such a pain in the butt, but we just kept waiting we just got it right off the Internet and no one had seen it.
Meb: It was like waiting Christmas Eve waiting on that announcement. Tom, this has been a blast, it’s been a lot of fun. If people wanted to and I don’t know if… you don’t really do a lot of public writing or anything else, is there a way for people to track what you’re up to these days or is that impossible?
Tom: So far the best way to track what I’m doing is to listen to your podcast because I don’t really go out and tell stories too much. But I’m gonna lift my profile slightly because even though we have plenty of capital, it seems like we always have more ideas in capital. So I’m not out raising capital but I do talk from time to time to different people. So I thought it would be better at this point to raise my profile just a little bit since I’ve been underground for so long. And I think it’s also gonna help me get some new ideas, so they may see me a little bit more. But you know, generally speaking, we’re pretty private.
Meb: Tom, it’s been a blast thanks for taking the time today.
Tom: Sure, thank you, take care.
Meb: Listeners we’ll post show notes, links to a lot of this fun stuff. Maybe we’ll convince Tom to publish his old short selling book. And it’s been a lot of fun. Well, check out the podcast archives mebfaber.com/podcast. Leave us a review if you like the show if you hate it, let us know. And send and Jeff some questions firstname.lastname@example.org. Thanks for listening friends and good investing.