Episode #462: Porter Stansberry on a Possible Recession, Opportunities in Distressed Debt, & The Bull Case for Energy Stocks
Guest: Porter Stansberry is a leading financial writer and the founder of MarketWise, a publicly traded, million-subscriber, multi-brand, financial publishing platform. In December 2020, Porter retired as MarketWise’s Chairman of the Board. He founded Porter & Company in April 2022.
Date Recorded: 1/12/2023 | Run-Time: 1:18:01
Summary: In today’s episode, Porter shares his frustrating ending with Stansberry Research and then why he chose to launch a new research firm last year. He walks us through the major themes he’s focused on over the next cycle: capital efficient, cash-flowing companies, a big upcoming distressed debt cycle, and the energy transition. Plus – he shares some names and ideas for each.
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Links from the Episode:
- 1:10 – Intro
- 1:46 – Welcome back to our guest, Porter Stansberry
- 4:02 – Revisiting his quote about how to spend your 20’s, 30’s, 40’s, and now 50’s
5:41 – The genesis of Porter & Company
- 11:51 – Porter’s adoration of Hershey’s as a business
- 13:12 – His most contrarian housing investment
- 20:20 – The power of hanging on to stocks in good businesses long-term
- 23:19 – The problem with bonds through 2022
25:13 – The Stay Rich Portfolio
- 26:05 – Cyclical strategies for fixed-income markets, corporate bonds, and distressed debt
- 27:59 – What can be learned from Carl Icahn and Icahn Enterprises
- 31:01 – Porter’s predictions for the world of distressed debt and future bankruptcies
- 35:35 – I Disagree (Faber)
- 36:05 – How practicable is it for individual investors to get in on distressed debt?
- 43:01 – A discussion about business creation and interesting founder stories
- 43:52 – His modern safety razor company, OneBlade
- 46:58 – A pessimistic take on clean energy, and the promise of natural gas and nuclear
- 52:17 – The investment highlights of T. Boone Pickens relating to the energy industry
- 54:26 – His take on the future of natural gas. Learn more at com
- 57:18 – Why nuclear is the most promising energy source in the long term
- 59:04 – Episode #343: Dr. Nathan Myhrvold, Intellectual Ventures
- 1:04:55 – Episode #456: Marc Cohodes on SBF, Fraud, & The FTX Death Spiral
- 1:06:20 – Porter’s investment beliefs that most of his peers disagree on
- 1:11:50 – Porter’s most memorable investment
- 1:13:21 – The role of short sellers in keeping companies liable
- 1:14:50 – Learn more about Porter; bostonblackout23.com; Twitter; Porter & Company
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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: What is up, my friends? We got a great show for you today. Our returning guest is Porter Stansberry, one of my favorite investment writers and narrators. We spent some time catching up on what he’s been up to the last few years, and also his newest venture, Porter & Co., which was launched last year. In today’s episode, Porter shares why he chose to launch a new research firm. He walks us through the major themes he’s focused on over the next cycle, capital efficient, cash flowing companies, a big upcoming distressed debt cycle, and the energy transition. Plus, he shares some names and ideas for each. Please enjoy this episode with Porter Stansberry.
Meb: Porter, my friend, welcome back to the show.
Porter: Meb, it’s genuinely a pleasure to be here. And I’m super happy for you that your podcast has turned into a sensation. I think you are definitely the leading financial podcaster in the world right now. And, you know, with the way you guys started, the business wasn’t as a media personality, but you have obviously a knack for it. Congratulations.
Meb: Thank you. I got started as a nerd. So, this is a lot for a nerd, but this is very great behavioral psychology move there, Porter. You know, butter up the host, get him nice to throw you some soft balls. I actually listened to our old conversation, which stands the test of time, by the way. Listeners, we’ll put the link in the show notes. But it was in 2016, five plus years since you and I connected on the podcast, which is too long. We should be doing this annually at most because I love catching up with you, listening to you, hearing what you have to say. But update our readers. Where do we find you today? Were you out in the water? Did I hear fishing yesterday?
Porter: I was fishing yesterday. I had a pretty good day, went two for two on sailfish, which is a fun day, and caught some meat fish along the way. It’s beautiful winter in Miami. The weather has been spectacular at 75 degrees, not a cloud in the sky. And I’m inside talking to you. So, you must be somebody special.
Meb: Well, on the YouTubers, you can see some fish in the background behind Porter. But I love keeping up with your fishing exploits. I come from a family of fishermen. So, I need to join you one of these days and get out there.
Porter: I have not been able to fish as much as I used to, Meb, because as you may have heard, I retired in December of 2020, or as I like to put it, I was suddenly un-busy. So, I spent about three years fishing and doing other activities on the water. And June of 2022, I launched a new financial advisory business, Porter & Co., which is what we’re here to talk about mainly for investors. And I’m back in the game, so to speak.
And so, now, I can only fish… Well, this is the first time I’ve gone fishing in 2023, and only the second time I’ve gone fishing in six months. So, too much work, not enough play for Jack.
Meb: Well, it’s funny to look back on the first conversation. We were talking about things, we were talking about your farm in Maryland. And I was like, “Oh, farming. Crop prices are in the tank. Like, what a terrible business.” And here we are, like, the crop prices have tripled since then. But you had a great quote, which I’ve used in various conversations since, but it got cut off. So, we’re going to have to update it. You had a quote, and this was kind of, like, Porter life advice. You were like, “Your 20s are for your learning, 30s are for your earning, 40s are for your owning.” Porter, you just turned 50. You cut it out. What are the 50s for? Fishing. I mean, you’re starting a new business, apparently.
Porter: Your 50s are for doing everything again, but better the second time. So, I separated from my wife of 20 years in 2018. I’m remarrying in July. I have a new baby, an unexpected new baby.
Porter: Thank you. So, I find myself in my 50s starting everything anew — a new relationship, a new life, a new business. So, I have to update my life strategy. Your 20s are for learning. Whatever you spend your 20s doing, is what you’re probably going to do the rest of your life. And so, it doesn’t really matter what you’ve made. What matters is what you can learn. And as you know, my friend Steve Sjuggerud put me in a position to be hands-on in finance and directing portfolios at a very early age. And that was a great experience for me.
Your 30s are for earning. You might recall that in my 30s, we launched Stansberry Research, which grew from a $36,000 investment all the way to a $3 billion IPO. So, that was a very good earning decade. And then that transferred, of course, into owning a lot of that equity in my 40s. So, what will my 50s be about? Learning, earning, owning, I don’t know, something about redoing.
Meb: Yeah. Well, we can check back in as we…you haven’t been through it yet. So, we’ll experience it together as I get there. You know, I know the answer to this or I at least think I know the answer to this. But many listeners would say, look, you know, they have this fantasy, this dream, “All right. I’m going to be successful, you know, have this farm, have a boat, get to the point.” They’ll say, “I’m just going to retire, sip piña coladas on the beach.” What did Hans Gruber say in “Die Hard.” He’s going to say, “Sit on the beach and collect 20% interest.” This is an ’80s movie. So, back in the days when there was 20% interest.
Porter: We’re rapidly returning to those days.
Meb: I know. And RIP, Alan Rickman, I think, is the actor’s name. He passed away, I think, last couple of years. But you decided not to just rest on your laurels and are starting a new venture. Give us a little behind the scenes origin story preview of kind of what you guys have started building and what the vision is.
Porter: What happened with me was we built this great business. It is a phenomenal business. When I retired from Stansberry Research in December of 2020, the previous 12 months, we had produced $150 million in cash, free cash flow. And we had over a million paying subscribers. And roughly 25% of our file were lifetime subscribers. So, it’s a very stable, very good business with a lot of talent in it. The financial performance of the company allowed us to reinvest heavily in all kinds of different technologies, software, people. So, we had a really good suite of services to offer investors.
And we had some people come to us from London. And I’m going to leave everybody’s names out of it because I’m not trying to cast any blame. It’s just a terrible circumstance. They promised us $400 million in exchange for more or less 15% of our shares. And then in doing so, we would go public. So, this was going to be a SPAC transaction. When we went to close the deal, though, the $400 million disappeared because all of their investors had redeemed. And for reasons that are very murky, and which I still don’t understand, our side agreed to close the deal with no cash. So, I ended up selling a $3 billion business to other people, but I never made any money from it, not a single penny. And the people who we sold it to clearly didn’t know what they were doing, and within a year, had run the business into the red. Now, how do you take a business that makes $150 million a year in cash and end up with losing money? I really can’t even fathom. But the stock collapsed from around 15 to now below $2.
And so, I’ve been buying back as much stock as I can because I would like to have a say in the company and help turn it around. And in order to facilitate not going bankrupt and having cash to invest more in what’s now called Marketwise, I started Porter & Co. in June of ’22. And it’s just me and a handful of old colleagues. These are all people I’ve known for decades. And we’re working out of one of my barns on the farm, and we’re doing what we’ve always done, which is try to find really, really good businesses that are trading at prices that we think make no sense.
And, you know, I’ve wanted to say this to you for a long time as I’ve been thinking deeply since I’ve started listening to your podcast and have known you for years. You and Steve Sjuggerud’s approach to the market as top-down people just makes no sense to me. And I say that, of course, with all due respect. The performance of your ETF speaks for itself. It works. And so does Steve’s track record. It works, too. But it just makes no sense to me because ultimately what I think, when you bet on a stock index or you bet on a sub-category of stocks or any kind of broadly diversified entity, any kind of index at that, what you’re really betting on is the stock multiple. Because if the market multiple goes up, you’re going to make a lot of money doing that. If the stock market goes down, you’re probably going to lose a lot of money doing that. And that all depends, of course, on interest rates.
The stock multiple is dominated by interest rates, which goes to the bond market. And you know what God said to the bond trader when the bond trader got to heaven? God said, “Hey. What do you think interest rates are going to be doing next year?” The point is that it’s very difficult to know what the stock multiple is going to be. Very difficult.
And so, in my career, what I’ve always tried to do is not understand the stock or the stock multiple, or even the bond market or interest rates. What I’ve always tried to do is figure out which business is going to win, because the stock price and the business will not stay disconnected forever. A great example of that is Tesla. Tesla is in a very, very tough industry. And even though Tesla is a very good business, it does not justify anything like stock price. So, eventually, sooner or later, Tesla is going to trade a lot more like Porsche or a lot more like BMW or maybe even more like General Motors, depending upon where it settles operationally. It’s not going to be Apple, trust me. So, that business and that stock aren’t interesting to me because it’s a pretty lousy business, and it’s definitely an overpriced stock.
What I like to do is find a great business that can survive an entire cycle and consistently outperform its peers, trading at a price that makes no sense.
Meb: My answer to what the question was, I think, was that when you find people that are entrepreneurs and creators, at their very core, they can’t stop creating art. Now, art could mean actual paintings, it can mean designing, building companies. In your case, you’re a builder. But I will give you a compliment. There’s probably only on one hand if I was to count my favorite writers and narrators about markets, Morgan Housel is a great one. Because I’m like the quant side of the brain, right? But the people that write incredible stories, and you’re one of them. And so, I love reading every single one of you all’s pieces. There’s not something I don’t learn, because it’s a lot of financial history. So, my answer to this was that you can’t help yourself creating and being an artist. So, when you’re ready to LBO, let me know. I can contribute my $10,000. But I do love writing about financial history. And I couldn’t have stayed away from writing and publishing for long. You’re right. I love doing it, and I love crafting a great story.
Well, so, you hit on, like, five different things we could use as jumping off points that I think are great. I mean, one of the biggest ones that we’ve been telling people over the past cycle is, yes, you have to make somewhat of a distinction between a business and a stock. Right? You could have a great business, and the stock is crazy expensive. And there are so many examples from the 2000 bubble where you had these great businesses that continued to grow for 10, 15 years, but the stock went nowhere. And vice-versa, of course. But we’ll talk about where you think the world macro ideas looks like. But jumping off from what you were just talking about, about good companies, I don’t know anyone that loves a stock like you love Hershey’s. Is that fair? Is Hershey’s, like, your favorite stock over the years?
Porter: And Hershey, of course, right now is an expensive stock. It is an incredible business. And what’s so amazing about it is, it only has to grow at rates that are similar to GDP. But because it’s so much more capital efficient than any of its peers, the stock is going to outperform. I mean, it’s inevitable. Could somebody wreck it? They’ve tried before. But it’s very difficult to unseat something like Hershey’s that has such a simple product that is so adored.
Meb: Well, there’s the old Buffett quote. He’s like, “I always invest in companies an idiot can run because eventually one day, they will.”
Porter: Let me give you my favorite company. And I do want to talk about where the world is heading. I do have a macro view, and I think it’s important, and I want to get to it. But what I want also to reach investors is I want my message to be, if you own a great business, number one, you should never sell it. So, the macro consideration is completely out the window. The only question is when you should buy it.
Again, I’d like to actually give it a real example because I manage a lot of people who claim that they’re in for the long run. And then, of course, next week, when they get scared, they recommend selling everything.
So, one of my most contrarian investment recommendations of all time was buying NVR, the home builder in the second half of 2007. And if you go back in time, you’ll remember that the housing collapse of ’08, ’09 began in the summer of ’07 with the collapse of subprime mortgages. And it was very clear by that point the real estate prices were rolling over, and the home builders were going to be in trouble. And in fact, if you bring up a chart, you’ll see that NVR stock began to decline in 2005, peaked in 2005, began to roll over, and didn’t bottom out, of course, until the spring of ’09. So, here am I in the middle of this ongoing absolute avalanche of stock price. And I say, you should buy NVR. Now, I didn’t say buy it today. I said buy it below a certain price, and I explained why.
If you don’t mind, I’d like to quote the newsletter because it’s eerie how this worked out. So, forgive me for a quote here, but I think if you’ll listen carefully, you’ll see why it’s worth it. So, I say to the reader, when should you buy NVR? The stock seems to have found a bottom around $400 per share. The company’s operating earnings peaked in ’05 when it made 1.1 billion. I think it’s safe to assume normalized earnings over the long term will average out to about half that peak level or about what the company earned in 2002. So, let’s say 500 million a year. Putting even a low multiple on these earnings six times to adjust for the company’s inherent cyclicality — sorry, that’s a tough word to say — gives you an estimated market cap of $3 billion which is 30% more than the stock price today.
I’m sure my timing is way, way, way too early, at least two years too early. But I’m prepared to average down to be very patient. If you’re willing to do the same and buy shares regularly over the next three to five years, you should buy shares of NVR below $450. Do not use a stop-loss in this position, as NVR stands no chance of going bankrupt. But sentiment in the sector is very likely to decline. I wouldn’t put more than 4% of my portfolio in this position, given the volatility. And I wouldn’t invest any money I thought I might need before 2020. Why buy now? The company is probably worth two or three times its current price. I believe earnings will begin to improve here before long and before the rest of the sector. And thanks to the company’s relentless share buybacks, the compound returns on this stock will very likely be more than 25% a year for the next 10 years. That’s a great investment, but it’s going to be a wild ride. So, you’ll have to be very patient.
So, guess what the average compound annualized return was on NVR over the next 14 years? It was over 20%. So, NVR’s earnings bottomed in ’08 at $100 million, and then they grew from there. And on average, from 2008 until now, the company earned on average $493 million a year, which is exactly, exactly what I forecasted, exactly what I predicted. And the return was exactly what I expected over a very long period of time.
And that was only possible not because I have a crystal ball, but because NVR’s business is so amazing. And so, what do they do? They build houses. Well, the houses are the same as the next guy’s house. How can that be? How can one business deliver such better results for investors? Keep in mind, it never lost money during the worst housing crisis in history. How is that possible? A lot of other home builders almost went bankrupt. They had to combine. Many of them did go bankrupt. What explains that?
Well, it’s very simple. NVR’s model is capital efficient. It doesn’t own any land. Ninety-eight percent of the homes they’ve built, they built on land that they bought an option for. So, they do not have the risk of having this huge levered asset on their balance sheet. And as a result, the returns on assets for NVR are way better than the industry’s. So, NVR makes 25% a year on its assets. It makes 50% a year return on equity. And it buys back stock at smart times, which makes it an absolutely perfect long-term investment, because it’s a simple business that everyone can understand. It’s a simple business that we’re going to continue to need, and it’s by far the best run company of its kind in the world.
Here’s the good news if you’re an investor. We are once again facing a housing crisis. Mortgage rates have skyrocketed. Demand for housing has collapsed. These stocks have collapsed. So, they’re now trading very cheaply. And the insight I’ve got for you is, one of the worst run companies in the sector was Hovnanian, HOV. And it should have gone bankrupt, but found a way by raising additional equity in deluding people to survive 2012, 2013, 2014. But the business was just a zombie. It was paying 100 million a year in interest expenses, and it could barely earn that much. So, all you were doing was funding the bond holders. You weren’t building any equity in the business.
Well, a bunch of executives from NVR went over to Hovnanian, bought the stock on the cheap, raised money by buying back the debt on the cheap, on the discount, retiring it. Now, Hovnanian’s interest expenses are, I think, around 35 million a year — much more manageable. And they did it by selling all of Hovnanian’s land. So, they’re copying NVR’s model.
So, last year, 70% of the homes that Hovnanian built were on optioned lots. And as a result, the return on assets at that company is now 30% which is more than NVR. And the return on equity is now 53% which is more than NVR. And because everyone is both afraid that it’s going to go bankrupt and afraid there’s going to be a housing crisis, you can buy Hovnanian today for less than one times earnings.
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So, for the listeners, you’ve had millions of subscribers. We have over 100,000 investors. One of the hardest things consistently is investors love to hold…they love to sell their winners to early. So, if you look at a lot of these books, “100 Baggers,” stories like that, that illustrate, hey, look, you know, you can get these 100 baggers, life-changing wealth. If you think about it, you know, 10 grand into a million. But often, they take 10 years, 15 years, you know, maybe even 20. But you want to hold on to them. Like, what advice do you have to people as you’ve been through this and done it over the years to kind of illustrate to them the concept of hanging on? Because I think it’s tough. For me, I like investing in private startups because I don’t get the choice to sell. Right? Like, it’s, they go out of business, they fail, or in 3, 5, 10, 20 years, something happens — M and A or they go public or something. But I don’t have that choice. It’s taken away from me.
And as a quant, you know, my funds do the rebalancing, choice is taken away. Because, I guarantee you, if I own a stock, it doubles. I’m like, “Oh, baby, let’s go on vacation. Let’s go,” you know, in my mind, I’m already… But at two baggers, only one step on the way to a 5, 10, 100. What do you tell people?
Porter: It’s funny. I’m not quite sure what to tell people because that is…it’s like you’re speaking not a foreign language, it’s like you’re from outer space. Like, that doesn’t make any sense to me. And I think the difference is, I actually fall in love with these businesses. I don’t fall in love with the stocks. Please understand that. I love these businesses, and I can’t wait for the stock to go down so that I get to own more of the business. But I don’t want to pay too much for it. And it never would occur to me to sell it. I don’t want to sell it. I know that company is compounding my wealth, and I also know that every year they get a little bit better. Every year they grow their moat a little bit wider if that was the kind of businesses that they are.
There’s no question in my mind that Hershey’s brand is worth a lot more than it was 20 years ago. The Accounting Standards Board says that Hershey’s not allowed to revalue their goodwill as a line item. They can only depreciate it, which I think is an accounting change that somehow we’re going to have to make.
So, there’s a lot of value that gets hidden, that you don’t get to see, but eventually appears in the form of cash flows and dividends. And, man, I just love that. I don’t think about the cash that I have in my investments in the same way that I think of cash that I get in the form of income from my companies or dividends or my salary. I always like to make money. I like it when the money in my checking account goes up and I get to spend it. But I don’t think of spending my investments. I just don’t think of it that way. When the stock price doubles, it doesn’t change my blood pressure at all. I’m just frustrated because now it’s probably too expensive to buy.
Meb: Yeah. Well, one of my favorite things about reading you all’s work, is not always just, like, the plain vanilla Hershey’s, the plain chocolate Hershey’s sort of ideas, but you guys have always been independent thinkers and come up with often off the beaten path ideas, at least to me and I think to the mainstream media. And you’ve written a few pieces recently that I think are especially illustrative of that. So, we’ll dig into a couple of them.
It’s funny because if you look back at our first conversation, there was a conversation we had where we were talking about really low bond yields. And I can’t remember if it was you or I that said this, but one of us said there will come a time when you have a big stock draw down and bonds won’t hedge. Everyone expects bonds to always do well when stocks pew. But if you look at the long history of stocks and bonds, that’s not always the case. In 2022, one of the worst, if not worst, years if you look at after inflation, the traditional 60/40…because that actually happened. Now, it’s a little later than our conversation, but the consensus expectation that bonds always help, demonstrated not to be true.
Porter: Absolutely. Yeah. I would argue with anyone vehemently about this, the idea that as a retired investor, you should have a substantial investment in bonds. And my opinion, it’s ridiculous in a world of paper money and negative real yields. That’s absolutely horrible advice. You’re much better off, much, much better off in a high quality corporation that’s paying you a dividend that can increase with earnings, and can protect you from inflation than you are in fixed income.
I’m not quite sure, you know, the way all the law’s regulations are around managing retirees’ funds and stuff like that. I think it’s very difficult if you’re retired, to avoid that because everyone is coached to put you in fixed income. But that’s a sure recipe for a financial disaster as a lot of people found out last year.
Meb: We wrote a piece during the pandemic that I don’t think anyone really read or resonated with, but I really liked, and we’re trying to turn it into, like, a white paper… The original topic was “The Stay Rich Portfolio.” And it kind of walks through this exact line of thinking or saying, everyone assumes bonds and T-bills are the safest investment. But let’s look at history. And we demonstrated…I can’t say proved because you never know in the future. But demonstrated that a diversified portfolio combined with a little cash was less volatile, had lower draw downs, had lower 12-month worst performance than a short-term portfolio of T-bills on a real basis, which is all that matters. Right? Now, no one believes that. There’s no corporate treasury or individual that’s going to put their safe money and invest it. There are a few of us in the world that do it. But it’s an interesting way of thinking.
But you’ve talked a lot about fixed income markets in general. So, not just talking about treasuries, but talking about corporates. That’s been a big theme for you. It still is a big theme. I think you guys are partnering up with a hall of fame fixed income distress guy that you can talk about, but maybe give us a preview of kind of what you guys are thinking of in that world, opportunities, pitfalls, landmines, etc.
Porter: I would say that, as an analyst, the greatest thing I have to offer investors is very detailed analysis of great businesses that you can hold forever. That’s, I think, what I’m best known for and what I’m best at. Secondary to that, I’ve had a lot of success over the cycles in ’08, ’09, and then again in 2015, 2016, capitalizing on distressed debt. And at the right times, you can definitely make more money in corporate bonds than you can make in stocks. And you can definitely do so with much less risk. And again, that’s something I think that’s not commonly accepted. It definitely depends on market conditions, but it’s certainly true in certain cycles. And we’re approaching one of those cycles, if we’re not already in it.
I personally think that high yield of many different kinds will outperform stocks this year. So, I would point investors to simple things like Annaly. Seventy-five percent of Annaly’s assets are guaranteed by Fannie and Freddie, and therefore, backed by the U.S. Treasury. It’s now yielding, I think, around 16%. It’s going to be very difficult, I believe, for the stock market to outperform Annaly’s yield this year. And I don’t think that mortgage rates are going to go much above where they’re at now because when they went above 7%, demand completely evaporated. And so, there is supply, and there is demand. And if demand diminishes, then prices have to fall. So, I don’t think you’re going to see mortgage rates above 7%. So, therefore, Annaly’s portfolio should perform very well, and that dividend yield should be safe.
Another example is Icahn Enterprises, which is essentially a publicly traded hedge fund run by Carl Icahn. Most people don’t know that Carl Icahn’s track record is actually better than Warren Buffett’s. And they don’t know that because most of his investing has been private deals — for example, trading hotels in Vegas and things like that. But the people who crunch the numbers can prove to you that Icahn’s outperform Buffett. And his stock, his hedge fund is now yielding 15%. Even if he doesn’t pull off some kind of amazing deal in this next year, I still believe that’s a great, great investment for… Again, I think it’s a very safe yield.
Meb: I love the old school guys. There are so many stories from their history. And Carl just continues to write, like, the most interesting man in the world stories. I mean, my favorite was during the original Trump election upset. He was drinking martinis at some party and left to buy, like, $2 billion of S&P futures as the election was going on overnight session. Like, this type of person you want running your money, who’s so obsessed with markets that in the middle of the night, you know, he’s thinking about how it impacts. But his fund or his stock, IEP is the symbol, is all-time highs. And hedge funds, there are so many of them, and so many of them are just kind of closet beta. You know, they just end up owning stocks that are a lot more expensive, which is not what you want. You want the esoteric, the zigzag ones, the concentrated. And if you look at Icahn’s performance, A, it thumps the S&P, but B, it’s totally uncorrelated. And he’s one of my favorite characters on all of Wall Street.
Porter: How many hedge funds are paying you 15% dividends to invest with them?
Meb: He’s the best. I love Carl. When I read that issue, it gave me a nice, warm, fuzzy feeling because he’s a character.
Porter: I don’t know if there’s anybody out here listening, but I would absolutely love to meet Carl Icahn. He lives about a mile away from me in Miami Beach. If anybody can put a lunch or dinner together with us, I’d owe them a big favor. And I’m sure there are people listening who can do that.
Meb: I’ll fly down for it, man. We’ll find a way to make it happen.
Porter: He’s definitely a living legend, and I admire the way he lives his life. I admire the way he deals with his outside investors. I definitely admire the way he deals with banks and insiders who are treating people in a way that’s reprehensible.
Meb: You guys got to read Porter’s issue on this. Maybe he’ll let us link to it on the show notes, but it tells a lot of fun stories about Carl. And there was once… Man, one of my favorite books, nerd out for a minute, long-time listeners may have heard this, but early in my career as a young person…I don’t even know if I…I was probably out of college when this happened, but Marvel was not the juggernaut it is today with the MCU and “Avengers” and everything. But it was a struggling company. It was dealing with bankruptcy. One of my best investments at the time was investing in Marvel during that period. But Carl got involved. And there’s a whole book about it. The distress world, to me, is the single most interesting part of the entire world of investing, but it’s way, way too hard pile for me. I’m like, “Oh my god,” the…
Porter: Oh, that’s why I love it. That’s why I love it. Throw me in there. Give me a 700-page venture, and don’t talk to me for three days.
Meb: Yeah. So, this book is a great book. It goes into, like, the old barbarians at the gate, all these stories. You guys are partnering and bringing on a pretty famous distress person. Tell us about it. Yeah, go ahead.
Porter: Let me lay that out for you. I think that this coming cycle in distressed debt is going to be the most interesting that has ever happened in the history of capitalism. I like to say that what’s about to happen over the next three years is going to be the largest legal transfer of wealth in history. And there’s no question that Carl Icahn is going to do way better at this than anybody else. But we’re going to do really good, too, because I’ve gone out and recruited the absolute dean of distressed debt, globally. His name is Marty Fridson. And there isn’t anybody in the distressed debt world that he wasn’t a mentor to. I mean, he has taught everybody how to do it. He’s in his 70s now, and he’s going to come work for my business Porter & Co. We’re going to set him up with a team of analysts which we’re recruiting right now. So, if you are a distressed debt maniac, please reach out. I’d love to put you on Marty’s team with us.
Let me give you an example of what’s happened. So, as you know, the fed has warped capitalism over the last 20 years by consistently manipulating interest rates lower than the natural rate. And that has encouraged corporate boards and corporate executives to lever their balance sheets in a way that no one would do if it was a private company. Why are they doing that? Well, because heads, they can buy back a whole bunch of stock and drive their options’ prices up and make themselves rich. Tails, they destroy the company, they get fired, they go get another job somewhere else, and they try it again.
The stock options are a great way of incentivizing people, but not when they also have control of the capital structure. And that’s the way corporate America works. So, let me give you a concrete example again because I focus on individual businesses. So, yes, you can see this in the macro. You can look and find out that U.S. corporations have never had more debt than they do today’s percentage of GDP. That’s fine, but I want to know what’s happening in an individual company level.
So, take a look at Harley-Davidson. Harley-Davidson is a pretty simple business. They make really crappy motorcycles, no offence if you happen to like a Har. I just don’t think it’s a very technically savvy bike, and I’m sure I’m right about that. Anyways, since 2004, they have added five…this is 2004, so, 20 years, over 20 years. They’ve added $5 billion in net debt to their balance sheet. Meanwhile, their earnings have gone from around a billion to around half a billion. So, their business has decreased by 50%, and in the meantime, they’ve quadrupled their debt load.
Would anybody run their own private business this way? The answer is absolutely not. What do they do with all the money? They bought back shares. So, the share count went from 300 million to about 150 million. They bought back half the stock. And then doing so, of course, drove their earnings per share higher even though earnings in fact were declining. And so, I’m very certain that Harley-Davidson will go bankrupt in the next three years. Very certain that will happen. When there is a recession, when people begin to lose their jobs, the first thing they’re going to do is sell their motorcycle. They don’t have to have it, they’ll get rid of it.
Harley was very distressed as well back in ’09, and Buffett was one of the people that helped bail it out. This time, it won’t survive because the debt load is way too large. So, at some point, Harley-Davidson’s bond holders are going to end up becoming his equity holders. And the price that that will occur is very important. And with good analysis, we can figure out what that price is going to be. So, we’ll know when to buy the bonds. The answer is not yet, but there is a price at which we will buy because, Meb, as you know, there’s no such thing as a bad bond. There’s only a bad price. And so, that’s a great example.
I have a prediction for you that everyone’s just going to completely disbelieve. But I think that Boeing is going to go bankrupt as well. And those bonds are going to be some of the most valuable investments that ever get made. There’s nothing wrong with that business. There’s only something wrong with its balance sheet, and it is in terrible shape. So, you can put that in the Porter’s crazy prediction that no one believes.
I said that AT&T would go bankrupt, nobody believed me. I said that General Motors is going to go bankrupt, nobody believed me. I said that Fannie and Freddie were zeros, nobody believed me. We can go on all day. So, this is the latest one. Boeing is going to go bankrupt, and you can quote me on it.
Meb: We just published a piece this week. I’ve been collecting…I was going to save this question for you later. So, we’ll come back to the question for you later. You can marinate on it, but we can probably do a whole episode with you, me, too, because it was called “Things I Believe in the Investing World That The Vast Majority,” so 75% plus, “of My Professional Investing Peers Don’t Believe.” And so, I’m up to 20 different things now. And so, I’m sure you could come up with maybe 100.
Porter: Yeah. I just think I’m just more certain about the few things that I do know.
Meb: So, for the distress world, how actionable is this for individual investors? Is it easy? Is it hard to go and buy these individual bonds, they got to get an account at Goldman? Like, what’s the actionable piece of this?
Porter: No. It’s actually very easy for individuals to participate in. The hard part for individuals is just it’s different than buying a stock. So, you have to know what the CUSIP number is. And with most discount brokers, you have to pick up the phone and call somebody.
The other fascinating thing is that… By the way, that’s not always true. So, for Interactive Brokers, for example, you can buy a bond just with the CUSIP number and it’s no problem. But the trick is, of course, some of these bonds you can’t purchase. Some of them are 144, which is institutional investors only. And some of them have full SEC disclosure and you can buy. And, of course, we’re going to focus on the bonds that are liquid, like Harley-Davidson’s are and like Boeing’s are, where you can easily trade.
So, the hard part for individuals is just getting used to a long CUSIP code and picking up the phone. That’s basically the only hard parts, and of course, those are not insurmountable obstacles to success. For some reason, doing it for the first time is usually hard for people, just emotional because they’ve never done it before. So, I always say, “Look, literally buy one bond.” If it’s trading at discount, it’ll cost you between $700 and $400. And put it in your account, and wait a month, and see how it feels. And if it seems normal to you, then you’ll be ready to, you know, buy more.
One difference is, bonds are expensive compared to stocks. So, a par on most bonds is $1,000. Sometimes it’s $10,000. Most of these bonds are at a par of $1,000. And so, if you’re going to have a diversified bond portfolio, you’re going to have to have, you know, a significant amount of capital. You’re not going to…I wouldn’t recommend ever just buying one bond, just like I wouldn’t recommend buying one stock. So, if you get into distressed debt, make sure, you know, you’re spreading your bets across 8 or 12 different opportunities. And I think you’ll do very well. Historically, we’ve made money on 85% of our distressed recommendations, and the average annualized return is about 30%.
Meb: So, as you think about the timing… So, I think that’s great advice on the diversifying across positions. So many investors’ classic mistake is they get to a new area, doesn’t matter if it’s stocks, startup investing, bonds, whatever, and they just cannonball into the pool. Right? They put all their money, half their money into the first one or two investments. And then if it works out, they’re brilliant, they continue with their terrible position sizing, and eventually go bust, or it does poorly, and they say, “That was stupid. I’m not doing that. What an idiot Meb and Porter were.”
So, starting small, diversifying across time, diversifying across positions, I think it’s really thoughtful. How should people think about the cycle when it comes to this? So, like, some of these positions and ideas, is it a consistent opportunity set? Is this something where you’re trying to wait until it hits the fan? How do you think about it?
Porter: Well, I would say, like anything else, there’s probably always an opportunity somewhere, right? At any point, there’s special situations. Like, I remember we did a Chuck E. Cheese bond a couple years ago. And it was a special situation where I wouldn’t have recommended the sector generally, but again, this is a special situation that was unique. So, there’s always an opportunity, but what I wait to do is, I want to see the spread widen enormously between distressed bonds, low-rated bonds, triple C bonds, and the treasuries. And I’m looking to see, you know, at least a 10% gap. And, you know, you can see bigger gaps than that. And the wider that spread gets, the more distressed that sector becomes, the better the pricing is, the better the opportunities are.
And so, if you want, you can do what I do, which is completely ignore the sector except for once every 10 years. And when it is flashing that there are a lot of opportunities, then you go out there and you buy a dozen of them. And usually, within three years, you’ve made a lot of money.
And the thing about these bonds that’s so neat is, we have done a very good job of avoiding bankruptcy. Now, certainly, no one’s perfect. We have had recommendations that ended up going bankrupt, but that’s not the ideal. What you want is a situation that people think are going to go bankrupt where there’s enough assets that they can sell, stave off bankruptcy, and then recapitalize. And, you know, there’s lots of that out there.
Meb: I’ve never bought a distressed bond. So, I may fall along just to get the experience of it. That’s the best way to learn, I think, is to start really small, go through the experience of actually participating and hopefully learn a lot, too. It’s one thing to just read Howard Marks’ memos and another thing to actually be doing it when it’s happening.
Porter: Yup. And, you know, you can of course make money in bankruptcy, too. And we have done that as well. But the ideal situation is where you get a convertible bond that’s trading at a huge discount from par, and you get the upside in the bond, and then the warrant or the convert comes in the money and you can make outrageous returns. We made…I can’t remember exactly what the return was, but it was absurd. It was 900% on a Rite Aid bond coming out of the ’08, ’09 downturn.
And again, I can’t tell you today what our positions will end up being, but I’m hiring the best team in the world to do it with me. Marty Fridson has been around literally forever. And I’m certain that we will come up with at least a couple of dozen opportunities that in another 10 years, people will be talking about as, you know, the craziest opportunities that anyone ever saw. Like, how was that pricing ever even possible? And you will have situations like that.
I can remember Steve Sjuggerud and I…this was in January of ’09. There was a PEMCO mortgage fund that was made up of all prime mortgages, prime mortgage fund. And it was yielding 28% or something like that because it was trading at such a discount. And he and I both looked at it and looked at it, and it was so good we couldn’t believe it. So, we had to read everything. And at some point, Steve mortgaged his house to buy it. And we made an absolute killing. I mean, within six months, we had made, you know, something absurd like 50% because it was then trading at a premium. Just incredible, incredible returns, when people get so fed up with risk that they just want out and they flush everything out.
And there are all kinds of cool stuff that are going to happen in this market. There’s going to be way more of that than normal because the corporate bond market has grown so much faster than the rest of finance that it’s completely imbalanced. And most of the growth was in the lowest quality of investment grade. So, when those things get downgraded, who’s going to buy them? There’s an enormous amount of corporate debt out there that’s going to be downgraded from investment grade to jump. And there isn’t enough capital dedicated to jump to buy it all. So, what are the prices going to do? They’re going to absolutely shit the bed.
Meb: By the way, my favorite stat…you mentioned Chuck E. Cheese. My son actually, who’s never been to a Chuck E. Cheese, in the car yesterday, he’s like, “Let’s go to a Chuck E. Cheese.” I’m like, “Where did you even see this? Like, is this on some YouTube video or one of your friends mentioned it?” But my favorite statistic is the founder of Chuck E. Cheese is also the founder of Atari, which is, like, if you’re a child of the ’80s, that’s like two of the biggest brands smashed into one.
Porter: I really admire entrepreneurs that can succeed in more than one field. That’s really challenging. What was the name of that hair, that shampoo guy who then started a tequila company, Patron?
Meb: Paul Mitchell.
Porter: Paul Mitchell, yeah. He had a shampoo business that was incredible, and then he went and started a great tequila company. And I always admired that. I thought that was amazing. I’ve tried my best to start a business in a separate field. I’m nutty about shaving and I love steel. And I hate safety razors because you always cut yourself with them. So, I designed a modern safety razor, and it’s called OneBlade. And if you’re interested, please go to onebladeshave.com. You’ll see what I did. I went to these incredible industrial designers in New York. I paid for this, really, all-new design. I actually have a patent on it. And then I went out and found the best steel in the world from Japan to make our blades with. And you can give yourself a genuine straight razor quality shave at home. We even have a hot lather machine for the home.
And it’s been very difficult. I’ve spent $10 million building that business over the last decade, and we have about 100,000 customers and we turned our first profit in December of last year.
Meb: Congratulations. I own one, but as you can see, I’m lazy. I just got back from Costa Rica for a few weeks. I didn’t take any razors with me. But I own one, it’s great.
Porter: Wow. Well, thanks, Meb.
Meb: Yeah. Well, the funny thing about…you know, you’re similar. I always have so many ideas. I’m always like, “We got to go start this business.” But the older I get, the more I’ve sort of pivoted to saying, “Look. I’m going to let these crazy, motivated entrepreneurs start this business, and then help fund them.” Right? That’s a lot easier way to do it. And so, it’s hard because, look, we always say the biggest compliment you can give an entrepreneur or investor is they’d simply survive. Every single entrepreneur I know understands that most businesses fail and yet they go into it with the incredible naivety, optimism that they will be the one to succeed, which I love. It’s amazing. But the reality is, you know, most don’t. It’s hard, it’s capitalism.
Porter: It’s so funny to go back and look at the original performance that you got from somebody 10 years ago or something from a private investment and just be like, “That’s not what happened.”
Meb: Dude, I’ve reviewed over 10,000 startups in the past 10 years now. And almost all are well-intentioned. Most are incredibly intelligent, passionate. But you get some conflicts of interest throughout the ecosystem, and information gets left out, people don’t do due diligence, the VCs have their own incentives. During the two-year kind of craziness surrounding February 2021, you started to see revenue projection charts that didn’t even have a Y axis, meaning, it was like year one, year two, year three. And it was like…and I think Masayoshi Son had one. And it was like, it goes up, but there’s no scale. Like, is this 1 million, is this 10 million, is this 100 million? It doesn’t matter. It’s just going up into the right. Like, how could anyone fund this or anyone, like, get behind this craziness? But that’s markets. That’s the bubbles that we have that leads to the FTX kind of thing.
Yeah. I mean, you often take your boat down to the Bahamas. I mean, you go dock in and see those crazy people running around.
Porter: I’ve been to Albany where he was living many times. It’s very nice.
Meb: Yeah, very strange story. I’ll give it that.
Porter: Meb, I’ve got one other big idea I wanted to run by you and by your audience.
Meb: Let’s hear it.
Porter: I want to talk about the energy transition.
Meb: Well, good. But you know how I was going to transition to this? I was going to say, Porter, you’re the only writer I know that could start off a piece talking about scrotums falling off and transition it into being a fantastic investment piece. So, let’s move on to scrotums. We’ve done enough investment talk. Let’s talk about balls now.
Porter: Well, the story about the scrotums is very…it’s pathetic, it’s sad. The London chimney sweeps suffered the first industrial cancers. And what happened was, as London moved from wood to coal as an energy source, the coal soot was cancerous. And they didn’t, of course, understand that. So, they kept cleaning these chimneys naked, and the soot would collect in the folds of their scrotums. And, of course, back then, you got to remember, everyone’s taking a bath, when they bathe at all, in cold water. So, they didn’t clean themselves thoroughly, and as a result, they developed malignancies on their balls. And the treatment for that, of course, was excruciating and led to a life that was much less fun and productive. But the point of the story was that society has always taken risks in pursuit of denser forms of energy.
I’ll spare you the long historical lecture about how coal is 10 times more energy dense than wood, and how that led to the development of pumps and internal combustion engine and all of the industrialization that followed. But the conclusion is, without a denser form of energy, the Industrial Revolution would have never happened, and man would have never essentially escaped the Stone Age. Now, we did because we had fossil fuels. And the folks out there who are advocating that we should eliminate fossil fuels are threatening to return us to the Stone Age.
The modern world cannot house, clothe, feed, or supply the number of people on Earth without fossil fuels, not even close. And if you look at how much money has been spent on alternative forms of energy over the last two decades, it’s an enormous number. It’s multiple trillions of dollars. And yet, globally, renewable energy only makes up 1% of the entire energy supply. The technology to move away from fossil fuels completely does not yet exist. It just doesn’t. And so, society is going to have to make a trade-off and you’ve seen what happened in Germany this year. Whoops. There’s no clean natural gas. So, we’re actually burning wood? And we’re burning coal again to avoid freezing to death. And I think that policy has now been revealed to be economically and intellectually bankrupt.
And so, the world is going to have to get serious about energy. And when you get serious about energy, you’re going to discover the only way to transition to either nuclear or some other form of power that we do not yet have is natural gas. And the good news for Americans is that America is the Saudi Arabia of gas. We have more gas than everybody else by a wide margin. And that’s not commonly acknowledged, but it’s definitely true. And when I say it’s not acknowledged, if you look at, you know, the official global reserves, Qatar and Iran are the leaders. But the reality is that America’s reserves are so vast that they haven’t all been proven yet. But that doesn’t mean that they won’t be.
So, just as an example, the Marcellus Shale is probably the largest gas reserve in the world. And 20 years ago, scientists estimated it had something like 20 trillion cubic feet. And now, they’re saying 400 trillion cubic feet. And what happens is that the more drilling that gets done, the more reserves are proved, the larger the estimates grow. And so, what I see very clearly is that the world is going to move more and more towards electrical distribution, and they’re going to move more and more towards natural gas as the base load energy source. And they’re going to do that because it’s the cleanest alternative, and it’s not nuclear.
Meb: Despite what the government says about your stove, which has been trending in the…
Porter: That’s the craziest thing ever.
Meb: What in the world? I read some headlines sometimes and things start getting whipped around. And I’m just like, what is going on? Like, what is happening right now?
Porter: Yeah. And I’ve got one story for you that really illustrates a lot of this stuff. Because I’m sure a lot of your listeners are very woke, and they’re going to say that I don’t care about the planet and that I’m, you know, going to drown the polar bears and all this stuff. And I just want to tell you, I’m not a climate scientist, and I don’t pretend to be. But I am a pretty good economist, and I can tell you right now that if you forbade the use of fossil fuels around the world tomorrow, billions of people would die. Not millions, billions. If you were to eliminate diesel fuel from the world tomorrow, you would have starvation within weeks. The world cannot operate without fossil fuels. And so, all this rhetoric that you see from all these people is absolute nonsense. And the politicians who buy into it are going to end up like the Germany’s Greens, and they’re going to be out of a job. Because nobody wants to see their family starve, nobody wants to live in the cold and in the dark.
So, let me give you some realities about this thing. T. Boone Pickens became a friend of mine late in his life. And he was an incredible, incredible investor and just one of the great characters in the history of finance. The dumbest thing he ever did was to believe in peak oil, which he did for most of his life. And it bankrupted him in ’96. And that led, of course, to his incredible comeback as well because he never changed his mind. So, he kept betting on natural gas futures. Eventually, he was right, and he made another $8 billion on it, which was great.
He believed we were running out of fossil fuels. So, he thought we had to save fossil fuels for transportation, for jet fuel, and that we should use everything else to generate electricity, including wind. So, in 2008, he ordered 667 1.5 megawatt turbines from General Electric, which was, I think, the largest turbine order in the history of the space. It was going to cost him $2 billion. And his plan was to build all of these windmills on his farm, which is called Mesa Vista. It’s in Roberts County, which is the very north part of Texas next to Oklahoma.
And he was well on his way. He was two years into the project when he discovered that his ranch was not anywhere near the rest of Texas’ electrical grid. And it was going to cost him $5 billion to build enough towers and wires to connect his wind farm to the Texas power grid. And that made the whole thing, of course, uneconomic, and he lost $2 billion on the deal. I mean, that’s from Boone Pickens who could have raised all the money in the world and has plenty of the smarts and everything like that, and still lost his ass in wind.
And so, so much of this investment into solar and wind is so economically ridiculous that the only people who would fund it are governments. And it’s going to cause inflation, it’s going to cause a slowdown in economic growth. It’s going to cause rate payers, electrical payers to pay ridiculous sums for energy. Look at what people are paying for gas right now in California. And I’ve written a lot about this. And if you’re interested in knowing more facts about it, I have a website, bostonblackout23.com, which will be in the notes, I’m sure.
And the truth is that Boston for many years has been buying natural gas from Putin instead of allowing a pipeline to be built connecting the Marcellus to Boston. And it’s the dumbest public policy that we have seen in the United States in a very, very, very long time. And the economic consequences of it are going to be severe, but so will political consequences. And I think you’re going to see a big shift in rhetoric, especially from the Democratic Party around energy. Within the next 6 to 12 months, natural gas is going to become a clean source of energy. And you will see people saying that natural gas is okay now because we have changed all the gathering technology to eliminate the methane leaks and all the stuff. And so, now, it can be burned clean, it could be harvested clean, it’s going to be a clean source of power. And if that doesn’t happen, then what you’re going to see is a massive rise in energy cost and in grid instability in the Northeast. And I don’t care what these people say. The moment the power goes out, people are going to change their minds.
Meb: So, give me some ideas. You were talking about nuclear. That’s a funny part where China has been going hard in the paint into nuclear. And I’ve never seen a public narrative shift as fast as Europe has on nuclear. I mean, it was like trying to shut down all these reactors, we’re moving on. And then it was like, 2022 all of a sudden, just kidding, nuclear is actually green. But we prefer to stay warm.
Porter: I don’t have the data in front of me, but I also know that over the last 10 years, China has built more coal fire power plants than the entire United States has in total. So, a lot of people don’t understand this about energy. Energy is completely elastic. Demand for it is completely elastic. If you lower the price of energy, people will use more energy. Period. Gas prices go down. Do people use less gas? No. They use way more gas. Why? They buy bigger cars.
The spending on energy remains pretty constant. And so, if you build more power plants and the price of electricity goes down, people are just going to use more of it. And so, people who think that by adding wind and solar to the grid, you’re going to get rid of fossil fuels, it’s nonsense. It’s never going to happen. People are going to continue to use as much energy as is produced, period. In fact, as you know, there is no greater…there’s no tighter correlation in all of economics than between real GDP growth and per capita electrical generation.
So, if you want your country to be rich, you’ve got to generate more electricity. You have to. And they’re going to do that in the cheapest way possible. And over the long term, the cheapest way possible is nuclear, which is why nuclear is going to win eventually.
The trouble, of course, is that it is dangerous. And when there are accidents, people freak out. But you do know that there are 82 secret nuclear reactors in the United States that provide a critical source of power to the government. It’s not a conspiracy theory. It’s the nuclear navy.
Meb: Yeah, yeah. Which isn’t something that has been around for the last few years. Like, nuclear navy has been around for a long time.
Porter: Since the ’50s. Yeah. And when’s the last time there was an accident in the nuclear navy that killed anybody? How about never? So, my point is, if you can build a reactor that’s safe enough to be on a boat, in a warzone, and that doesn’t ever lead to serious accidents, then why can’t people build a safe, small scale nuclear reactor in a community? And the answer is just a matter of educating people. They just don’t understand that radiation is not nearly as dangerous as everybody assumes it is.
Look at the Fukushima accident. How many people died because of radiation? No one. That was a complete disaster. And so, then, you know, they go to Chernobyl, but most people don’t know, Chernobyl was operating to develop nuclear war heads. It wasn’t operating in the parameters that you would operate a normal electrical plant. You know, they were messing around and they found out. But that shouldn’t tarnish the nuclear power industry as a whole.
So, I do think you’ll see that over time. But I think that transition will be very slow. I do not think that nuclear power will outpace natural gas power for at least 50 years.
Meb: There was someone I saw on Twitter that said, we need to rebrand. Nuclear has just got bad image marketing. We need to rebrand it elemental energy. That sounds way better, like much more palatable. We had Nathan Myhrvold on the show — post the link in the show notes — who’s been trying to develop safer, smaller nuclear power plants in partnership with Bill Gates and others, and has been having one hell of a time. But they’re finally getting a pilot project done in Wyoming, Idaho, Montana, one of those states that’s a little more forward-thinking. Do you have an investment idea there? Anything we can think about?
Porter: Yeah, I do. It’s actually my latest recommendation in my newsletter. So, why don’t you guys subscribe?
Meb: There you go. Good lead in. Because when I used to look through 13Fs all the time, my favorite managers were not the ones that were just the hedge fund hotel names. You’re like, “Oh my god. Every single fund owns this stock. But it was the ones, when I look at the 13F… And Seth Klarman is such a great example of this at Baupost, one of the most famous value investors ever. You look at his 13F and I would just go down and be like, “I’ve never heard of this company. I don’t know this stock. What is this?”
And to me, that’s the whole point if you’re digging through. And so, reading about this, I’d never heard of this company. And if you pull up the chart, it’s a beautiful chart, too. So, check It out, listeners. Go sign up for Porter. So, how does it work for listeners? You got a free service, you got a paid service.
Porter: I’m a one-man band. So, there’s really just one thing I’m offering right now, and it’s a newsletter that covers a unique opportunity every other week. So, it’s called Porter & Co. and the newsletter name is “The Big Secret on Wall Street.” And what I’m trying to do is find these really long lived investment ideas that you can own for five to seven years at least, and that are still really well ahead of the crowd. Right? I not going to be covering…you know, I’m trying to think of what’s the trend that’s just not falling apart? Tesla. I’m not going to be covering electric cars in this newsletter. You can find all that research anywhere else.
I’m trying to figure out, for example, who’s going to be building the very best small-scale nuclear reactors that the world is going to be buying up by the thousands in 10 years? And I want to get involved in that now. And I want to get involved in housing now because it’s completely out of favor, and nobody understands it the way that I do. And I can show you exactly which company to buy now that’ll perform over the next dozen years. And that’s what we do, it’s not rocket science. It’s just deep dives into individual companies that have their own ecosystem, they have their own economics that are going to continue to succeed. Regardless of whatever happens to the dollar and, you know, blah, blah, blah.
But I do have one macro bet, and that is energy. I think that the price of energy is going to go way up, and I mean that for natural gas and oil. And I’ve recommended a couple of different good ways to play it, but the very best long-term idea is the companies are going to be able to take gas from America where it’s very cheap, and distribute it to the world where it’s very deer. And there is a company underway right now called Tellurian which is the new business of Souki, Charif. And Souki, Charif, talking about people who love to create business art, he got started in LNG back in 2006. And, Meb, I wrote one of the most famous newsletters of all time about this guy. And I said he was the biggest idiot of all time, and that if you were trying to have a contest for the worst business idea ever, his new company which was called Cheniere would be the winner. Why? Well, because he thought we were running out of oil. This was the peak period for peak oil ideas. And he was going to spend $2 billion to build an LNG import terminal at the Gulf Coast. Are you kidding me?
The headline was “Madness.” And I wrote that he would definitely go bankrupt, and this was the worst idea ever. And of course, I was right. The stock collapsed. He almost went bankrupt. He got a big investment from some private equity firm. I can’t remember if it was Apollo or Blackstone. I can’t remember now who gave him the funding, but he got a lot more money and he reversed course. He went from building an LNG import terminal to building an LNG export terminal. And then I recommended the stock, and it went from 2 to I think it’s around 160 today.
So, there is already a case study in America for why this is a great use of capital investment and why it’s likely to succeed. His new project combines gas reserves with a new LNG export terminal on the Gulf Coast. So, he’s vertically integrating. He’s buying up wells in the Haynesville which is in Northern Louisiana. He’s built a pipeline called Driftwood down to the Gulf Coast. And now, he’s building an LNG export facility also called Driftwood. And he’s going to be able to strike a long-term supply deal with somebody in Europe or somebody in Asia, or both, that will pay for the development of this project over the next three to five years. And he’s going to be selling gas, I would guess, over the long-term at around $10, you know, an MCF, whereas the prices today are around 3. And then there are also…you know, you have to tack on maybe another $2 for processing your shipping.
But that price is…you know, without that energy, you’ve seen the revolution in Sri Lanka. You’ve seen problems in Pakistan, you know. All these people who got priced out of the market because Europe started buying up all the LNG. They need energy and they’re not going away. Most people don’t understand that across the world in emerging markets, emerging markets people use only a quarter of the energy that developed world people use. It’s not going to be like that another 10 years. They’re going to continue to grow their populations, and they’re going to continue to grow their energy density. And there is going to be more and more demand for energy. It’s just inevitable.
Meb: One of the big benefits of becoming intimately knowledgeable about a company and stock is, sometimes you realize that the story has changed. And this is a great illustration. We recently did a podcast, listeners, with Marc Cohodes. And if you listen to the end of the episode, he has a really great story about a similar situation where he was short a company, but new information came to light. Company shifted and all of a sudden became one of his best investments ever. I think that’s a great illustration of not becoming married to, you know, your idea or position. And for those who are thinking, “Oh, no. Porter is just a forever energy bull,” I’ve heard you talk when oil was above 100 many, many years ago, days past, when you’re like, “No, no. Oil is going down to 20, 30 bucks,” whatever it was at the time. So, you’re not just a …
Porter: Yeah. Oil was at 140, and I explained it was going to 40 — that was in 2014 — because of the shale boom.
Porter: By the way, I don’t have a particular eye on where the price of oil is going to be in a year. I think there could be a lot of demand destruction if there is a severe recession, which I think is very likely. But my point is, if that were to occur, I’d be a buyer. I don’t think in 10 years we’ll use less fossil fuels. I’m certain we will use twice as much. And now, the pricing is very attractive and the businesses are being run much more rationally.
Meb: There’s another example of a story I had not heard of, which is a great deep dive. We’re keeping you a long time, so let’s wind down to a few more questions while we got you, let you out into the beautiful Florida afternoon.
The things we talked about today, let’s hit back to this topic, and you can pick one. I’m sure there’s very many. But of the investing world beliefs you have, the vast majority of your peers disagree with you on, which ones come to mind? It’s funny when you mentioned Tesla because one of my 20…I just published this piece called “I Disagree.” But one of my 20 was you don’t have to have an opinion on every investment and stock. So, you don’t have to have an opinion on Tesla. Just saying, “I don’t have opinion on this,” is totally okay. Like, the media gets obsessed with whatever the topic du jour is — Bitcoin, Tesla, whatever it is today.
So, what’s something that you believe that the vast majority of your peers disagree with you on?
Porter: I think that Bitcoin will supplant the U.S. dollar as the world reserve currency in my lifetime.
Meb: That’s definitely non-consensus except for this tiny cohort. I mean, Porter, have you been just poisoned by the water in Miami? I mean, that’s where all the crypto people are flocking. I was going to say, are you in El Salvador? I know you spent a lot of time in Nicaragua over the years.
Porter: I have never bought a single crypto, and I don’t think of Bitcoin as a crypto.
Porter: But I buy a lot of Bitcoin.
Meb: And what’s the way you think about that? Do you think about it through… Obviously, you’re not doing it on FTX. Do you just buy the spot? Do you buy funds? Do you buy, what?
Porter: Lately, I’ve been buying $10,000 of the Bitcoin every day through Coinbase. And maybe this is foolish, but I think Coinbase is regulated in the U.S. And I think that my Bitcoin is safe there. I also, of course, every now and again, will take some out and put it in cold storage. There’s devices for doing that, you can buy usually on Amazon.
I started buying Bitcoin at around 5,000 and I stopped when that went over 10. And I started again recently when it went below 20. I’m no expert about what it cost to mine, but I’m pretty sure that the current price is below the average likely cost to mine over the next 18 months. And that’s the only way I do it. By the way, you know, for many years, I’ve bought gold in the same way. When gold goes well below the cost to mine it, I’ll start buying it. And I’ve never sold an ounce of gold, and I’ve never sold a single Bitcoin. And for me, this is just savings.
I think people get really confused about what the role of Bitcoin is. It’s not a money that you would use for transactions. It’s a reserve money. And if you know anything about economics, you know about Gresham’s Law, you know that Bitcoin is never going to circulate because it’s a much harder form of money. And that’ll never happen. You know, people are always going to transact in the weaker currency and hoard the stronger, which is perfectly normal.
So, I love it when I talk with journalists and people who don’t understand anything about economics or the history of money, and they’re like, “Well, when was the last time you used Bitcoin to pay for a haircut?” And it’s like, that has nothing to do with it.
The way that I like to describe it, gold was the perfect money for the Industrial Revolution because its scarcity grew at the exact same rate the productivity grew because of the internal combustion engine. So, as we had more steam shovels, we could dig more gold, we could produce more gold, there was more supply. But the remaining gold got harder to find, gold became progressively more scarce. And it was a perfect connection between the gains and productivity, and the industrialization, and the growing scarcity of gold, which is why an ounce of gold is always paid for a fine men’s suit. That goes back to the time of Bible to today. So, it’s been a very stable form of savings. And I think that the Information Age will challenge that. I think that gold will become much cheaper to produce and much more plentiful as technology improves.
The things sort of seem impossible now. In fact, I once wrote an April Fool’s joke about turning sea water into gold. But obviously, there’s a lot of gold deposited outside of river mouths around the world, and eventually, technology will lead us to find a way to collect those items and harvest it. I’m not saying it’s going to happen in my lifetime. I’m just saying that’s inevitable. That will happen.
And so, going forward, I believe that Bitcoin will be the harder, firmer form of money because its productivity is tied to computing power. And so, ultimately, technology will give us dominance over the physical universe and what will remain, of course, is growth and intelligence, and that’s computing. And Bitcoin is the appropriate money for that growth and productivity.
Meb: Fun. Well, on a related note, we manage a lot of momentum strategies, and some of the global ones have not owned precious metals in quite some time, but they’ve been adding recently along with for probably the last four or five months, global equities, foreign and emerging, which…
Porter: Absolutely, as the dollars rolled over.
Meb: Yeah. So, they’ve started shipping into those.
Porter: There’s a lot of interesting emerging market debt out there, too, that’s very high-yielding and very interesting.
Meb: As our mutual friend says often, Steve Sjuggerud, his favorite investment is when value and momentum and trend intersect. It’s rare, doesn’t always happen, but emerging markets, I put in that bucket. I’ve certainly been just waiting for … for many years as emerging markets have been cheap. But they seem to be getting a little momentum. I don’t want to jinx it. We’ll see what happens.
Porter: Sjuggerud says he likes things that are cheap, hated, and at an uptrend.
Porter: And I always reply, “That’s why we’re friends.”
Meb: Yeah. Yeah. Yeah.
Porter: I’m cheap, I’m widely hated, and I have been at an uptrend.
Meb: I love it. Porter, of your thousands of investments over the decades, what’s been your most memorable? Good, bad, in between. You can even list a few if you want.
Porter: My most memorable is not hard at all. It was shorting General Motors, because every quarter I wrote what the chairman of General Motors should have been telling investors if he was being honest. And the answer was, “We can’t possibly make enough money selling cars to pay back our debts or our pitch and obligations. It’s not even close.” And I started writing these in 2005, 2006. And of course, General Motors did go bankrupt eventually. And I just had so much fun doing that. And the funniest part was how many of my poor subscribers actually replied, thinking that it was actually from the chairman of General Motors. So, they completely missed the satire.
Porter: I had so much fun doing that because there just aren’t many instances in finance where things are completely crystal clear. There is absolutely no way out. And I thought the same thing about General Electric for many years as well, which finally of course did roll over. And now, it’s been dismantled. But those are my favorite situations. And they end up being shorts not because I like to see companies fail, but because that’s the one part of finance where you can have absolute certainty. There is no way, there is absolutely no way the equity in its current structure can repay those debts. So, there’s either going to have to be a mass delusion or there will be a bankruptcy.
Meb: We love having short sellers on the podcast. One, it’s because they, by definition, tend to be very independent thinkers. There’s a little bit of a contrarian bone in their body. They often really have to understand position sizing and risk because otherwise they get taken out to the wood shed and lose all their money. And they always, you know, have a screw or two loose. But over the past decade, this romping, stomping U.S. bull market, you know, there’s all the charts that show, like, short selling funds and percent of stocks that are short, like, just declining to the point where they’re almost extinct. And we kept saying, “Look. Shorts are the life blood, they’re like the immune cells of the financial system.” And I regularly get into fights, particularly like February 2021 when short sellers were evil and GME and all that crazy stuff. But I said, “Look, you know, do you think that regulators and politicians are going to keep these companies honest?” Like, no. Who’s talking about FTX? Who’s Marc Cohodes? Like, it’s not people…the government is not going to…they get it right eventually, usually.
Porter: Yeah, after the horse is long out of the barn.
Meb: Yeah. So, the short sellers are not only useful, but necessary to keeping the system honest because, man, there’s a non-trivial amount of frauds in the corporate space. You think it wouldn’t exist in these giant companies, but it does regularly. So, I love those ideas because they at least spin you up and make you think as well.
Porter, it’s been too long. This has been a lot of fun. Remind the listeners. They heard it. But what’s the best domain? Where do they go?
Porter: Well, we’re asking you guys to go to bostonblackout23.com, and you’ll see some of our work there, and have the opportunity to sign up to get access to all of it. And Meb, it was a genuine pleasure to talk to you, as always. And I’m very grateful that you had me on the show in support of my new business. It’s a favor I’ll never forget.
Meb: Yeah, man. Well, love to do this in person soon. And so, thanks much for joining us today.
Porter: Very good. My pleasure. And I hope to see you soon.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at firstname.lastname@example.org. We love to read the reviews. Please review us on iTunes and subscribe the show anywhere good podcasts are found. Thanks for listening, friends. And good investing.