Episode #509: Austin Root, Stansberry Asset Management – The Case For Productive Assets – Meb Faber Research
Episode #509: Austin Root, Stansberry Asset Management – The Case For Productive Assets
Guest: Austin Root is the Chief Investment Officer of Stansberry Asset Management. Previously, he co-founded and ran North Oak Capital, a New York-based hedge fund that received a strategic investment from Julian Robertson and Tiger Management.
Date Recorded: 11/1/2023 | Run-Time: 1:00:14 
Summary: In today’s episode, Austin starts off by discussing the combination of financial planning & investment management. After giving a masterclass on private credit, he shares why he describes himself as a tweener when it comes to investing, the role of gold in portfolios, and much more.
Sponsor: AcreTrader – AcreTrader is an investment platform that makes it simple to own shares of farmland and earn passive income, and you can start investing in just minutes online. If you’re interested in a deeper understanding, and for more information on how to become a farmland investor through their platform, please visit acretrader.com/meb.
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Links from the Episode:
- 1:02 – Welcome Austin to the show
- 4:17 – Overview of Stansberry Asset Management
- 6:20 – Surveying the current investment climate and evaluating treasury bonds
- 12:23 – Austin’s focus on owning productive assets
- 18:15 – Overview of private credit
- 26:42 – Committing capital to top-tier companies
- 28:20 – Weighing a quantitative method against a discretionary strategy
- 32:22 – Delving into the investment in Vita Coco
- 35:11 – Considering stocks beyond national borders
- 40:23 – Appraising gold and the value of tangible assets
- 45:35 – Investing Truths article
- 45:53 – Discussing Austin’s most unconventional viewpoint
- 53:54 – What’s Austin’s most memorable investment?
- Learn more about Austin: Stansberry Asset Management
Transcript:
Welcome Message:
Welcome to the Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer:
Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb:
What’s up you all? We got a fun episode today, our guest is Austin Root, Chief Investment Officer of Stansberry Asset Management. Previously, he co-founded and ran North Oak Capital, a New York based hedge fund that received its strategic investment from Julian Robertson of Tiger Management.
In today’s episode, Austin starts off by discussing the intersection of financial planning and investment management. After giving a masterclass on private credit, he shares why he describes himself as a tweener when it comes to investing the role of gold in portfolios and much more. Please enjoy this episode, the Austin Root.
Meb:
Austin, welcome to the show.
Austin:
Thanks, Meb, great to be here. Longtime listener, glad to be an active participant this time.
Meb:
Where is here for you? Where do we find you?
Austin:
Maryland, north of Baltimore in Towson.
Meb:
Well, I got to hang out with you over this past month, it was recently also on a little farm outside of Baltimore and then in Las Vegas at a really wonderful conference. Who was your favorite speaker from that conference? There was some pretty big names up there, any stick out as being particularly memorable?
Austin:
Probably Rick Rule, I liked him, I expected an absolute doomsday forecast and it was to some extent pretty negative, but in the end, I agreed with most of what he said in the essence of it, so I enjoyed that.
Meb:
Rick’s great, listeners, he’s a prior podcast alum and he has one of the better investing quotes about trading where he was talking about some asset that was hated or abandoned and he said it’s called the owl trade, where you pick up your phone and call the broker and say, “all right, we got to sell this position,” and the broker says, “to who?” And I thought it was such a good analogy when there’s something, this sentiment is truly hated, that there’s just no buyers.
Austin:
Yeah. We have clients that listen to Rick and to other thoughtful folks, and one of the points that he makes is, the dollar is terrible, there’s no reason to hold so much of your net worth in cash under your mattress because it’s going to be devalued and debased. But the missing point that he made in Vegas and that some of our clients miss is, it is the least dirty shirt, or however you want to say it, it is a better currency, it is the best performing currency over the last 30 years among all the fiat currencies because they’re all terrible. So I was happy to hear him reiterate that, and really what that means, and we will talk more about it, is you can’t be there, you got to be in other more productive assets for a big portion of your capital.
Meb:
I said there’s some really great speakers, we had Morgan Housel was there, got to listen to Lance Armstrong, Peter Zion is another podcast alum, always fun to talk about the world. But the favorite was, there was a pickpocket and the pickpocket of Paula Robbins who was also just recently on the Tim Ferris show was astonishing on his ability to take whatever is in people’s pockets, and even when you’re watching and looking for it, I’ve never seen anything quite like it, that was pretty awesome.
Austin:
I was watching him in the night before, he had been at Porter Stansberry’s in the firm, and so I was making sure to stay clear of him because I didn’t want to become a part of the act.
Meb:
He took my coworker’s credit card out of his wallet without him noticing, so it’s not like a bunch of plants, real deal. Anyway, let’s talk about markets, so there’s a lot of varied views when we were in Las Vegas, I feel like, which is good, I watched you give a talk on this firm in Maryland and thought it was very thoughtful. First of all, tell us a little bit about you all’s asset management division and then let’s start talking about your overall view of the world today.
Austin:
Stansberry Asset Management, or SAM as we like to call it, is focused on really providing what I think shouldn’t be as unique as it is, but is more and more harder to find for investors, and that is marrying holistic financial planning wealth management with informed active, sophisticated investment management. That’s in a nutshell, we’re trying to do both of those things for our clients. I don’t know, over the last 30 years it feels like those two things have bifurcated, where on the one hand you have the stock pickers all include quants and creating ETFs, and so it’s creating the investment management products, T. Rowe Price’s of the world.
And then on the other hand, you have the financial advisors that are trying to help you with the wealth management plan, but aren’t necessarily very close to the actual investment decisions on the basis of which they’re getting paid. So they’re good at the asset gathering, they’re good at the wealth, the financial planning, but they don’t necessarily know what you own and why as an investor. So at the heart of what we’re doing, is trying to bring those two things back, and that’s not the way it was before.
When we can do it in-house, when we have the capability and the capacity, we will do it in house and we want to have an active informed view pretty much on most of the public markets. But then increasingly, we’re looking into the private markets also to add value, add differentiation, lower correlations for our clients, and we’re looking to outside managers for that expertise largely. But that’s in a nutshell what we’re doing, trying to bring it all together to help folks build a long-term financial plan that gets them to their investment goals.
Meb:
That’s what it’s all about. Well, all right, let’s talk about the investing side, what’s the world look like? Is everyone and your client base just all in on T-bills now? I think we’re sitting in 5% T-bills and chill or what’s going on, what’s your views of the world?
Austin:
That’s certainly a part of it for us, I think we’re still in the Barbell Arena where on the one side of that Barbell, it does make sense to have some dry powder in cash and in fact in T-bills, short-term US treasuries generating five, five and a half percent, fantastic on a risk adjusted basis, we don’t think there’s a lot of risk there, generate nice returns. In the middle, I would say our corporate bonds a little bit more risk, not much more yield, the spread to US treasuries is very tight, so we don’t see a lot of excitement there. Same goes for quasi fixed income surrogates like utilities and REITs, where the value of the basis for them for the most part is their dividend. But on the other side, high quality growth equities, if you steer clear of some of the ones that are overbought, we see a lot of attractive opportunities there.
We’re still in that Barbell for most of our strategies and most of our clients. And really, the amount to which you weigh one side or the other of that Barbell depends on what your goals are. So Meb, we’ve talked about this, I think few investors really focus on aligning their investment portfolios with their ultimate long-term objectives. And so if our client is more focused on capital appreciation, then we’ll have more of that equity heavy side of the Barbell. And then if they’re more focused on capital preservation, then we’ll have more of the short-term US treasuries.
Meb:
Yeah, there’s always a weird disconnect if you listen to investors when they have a certain goal, so let’s say, this is a conversation I had with someone, that their child is going to college and they have the money in a 529 and had it in Tesla and made a bunch of money, and so there’s no scenario that this kid now is not covered for college. And I was like, “this goal was achieved, why don’t you sell this stock and put it in our T-bills or whatever because the goal has been made, you don’t need to risk this anymore.” “But Tesla’s great and this is going to go up.” And I said, “but that’s not the point of the goal.” The point of the goal is not to gamble with the stock speculation and have a $5 million 529, and also the challenge is everyone wants to think binary, like I got to have it all in Tesla or nothing. I was like, “you need to just start selling down some because you’ve funded this, it’s done.”
But I think it’s the William Bernstein phrase, but we love, is like, “when you’ve won the game, you don’t have to keep playing,” and I think a lot of times investors continue to keep playing and get into a lot of trouble chasing the next goal, the next comma.
Austin:
Meb, on that point, we do have some of our clients and some folks that I talk with that still have a greed and aspirations of just making a ton of money top of mind. But increasingly, it’s the opposite emotion that most people are feeling and that’s fear, just innate worry, it forces a lot of folks to pull back and invest less in the market, sit in cash, sit in gold, sitting in some short-term US treasuries. And I think an important message that we have for folks is, if you’re not going to use that money in the next couple of years, if your goal is appreciation because you’re going to be needing it later in life or it’s for legacy capital for your family, then even if you’re worried about the world, and in fact, especially if you’re worried about the world, you do need to put some capital to risk in what we call productive assets.
My mantra right now, it’ll be, clients will repeat this back to me because I say it so much to them, right now, the best defense is a good offense. And if you’re a football fan out there, that’s the opposite of what the football mantra is, where the best offense is a good defense, you protect yourself and then you put yourself in a position to score. In this market, the way to protect your purchasing power and your net worth is to play offense by owning those productive assets. So those are assets that will generate cash flows for owners, and there’s three keys for us, you need to generate cash flows or returns in excess of inflation, in excess of your own personal cost to capital, and then finally, you need to make sure it’s done on a prudent risk adjusted basis.
You can’t just look for that absolute highest return because there are scenarios where you invest in those super risky assets, the return profile is very, very high, but you can lose a lot of it. Look at many of the venture capital returns right now, where the expected return is very high on an average basis, but the realized return right now is very, very low. So we’re focusing trying to remind clients that there are prudent ways to do that, but that is what you need to do, especially if you’re worried about the world.
Meb:
We did an old paper thinking about this, and T-bills are all fine and well, but a globally diversified portfolio when you include everything, stocks, bonds, real assets. We think over time, historically has done a really good job both sides, offense and defense, because investors love to think in nominal terms and for a long time, really hasn’t mattered because there’s been no inflation. But now that we have some inflation, it’s an environment where that inflationary drag is very real and material and for the last couple of years was more than bond yields and what people call financial repression.
And so in those environments, the productive assets, like you’re talking about, play a much bigger role in our quote. I think, and this isn’t consensus, but safer than a lot of assets that aren’t productive. So what’s in you all’s menu of productive assets? Is it mainly equities? What else falls under it?
Austin:
Lots of equities owning the world’s best businesses, if you can build a case for this being a larger, more profitable business a decade from now than it is today, we generally want to own those things at a reasonable price, of course, but that requires solid management, it requires an appreciation for secular changes in consumer demand and technology, it requires a strong business model. You have to actually generate nice returns on invested capital, so we are looking for those kinds of businesses and happy to talk about some of those.
Another part of the market though that we’re increasingly interested in is in private credit. Meb, I know you’ve been invested in the private markets for years, decades, largely I think in the venture capital area, and so we’ve had more clients over the last few years ask us, “should I be invested in alternative assets and alternative investments?” And we’ve had opportunities for those clients to be invested in private real estate, but we wanted to do, over the last year and a half, just a full canvas on how to really answer that question for folks definitively. And where we’ve come out is yes, so the two big downsides on alternative assets sometimes is you generally have higher fees and you generally have worse liquidity. So you need to justify those two bad things with better risk adjusted returns, better overall returns.
Meb:
Well, the liquidity, depending if you know what you’re getting into, can be a feature, not a bug. If you tell a client, “look, we’re investing in this, you can’t sell it for 1, 3, 5, 10 years,” it may actually help them behave. It’s when the liquidity is the opposite, where either you don’t expect to need it and then need it. So there’s a mismatch between either life event happens and all of a sudden you need this money, or you’d never thought in the first place that you couldn’t have liquidity, which is like the Blackstone REIT. I feel like mentally people are like, “I can just get my money out,” but then they’re like, “actually just kidding, we’re gating this.” The mismatch between that becomes the problem, if you know you’re getting into it and you communicate it, then it actually can be a pretty good thing.
Austin:
I think that’s 100% right, you can’t be a liquid with all your capital, but for a portion of your capital. And again, this is why the financial planning and the holistic view is so valuable for us, we want to work through what that level is. But if you think of an endowment or an institutional investor, that level could be 30, 40% of their capital, they’re very happy being a liquid with.
Meb:
And by the way, the endowments learn that lesson in 2008 and ’09, a lot of them got in deep liquidity problems because they had all these private assets and when everything went down, you couldn’t do anything. So all of a sudden the privates got to be much, much, much bigger part of the portfolio. Hopefully, they’ve learned that lesson and figured out how to manage around it, but that was a big problem for a lot of them because last thing you want to do is sell a bunch of distressed assets when you least want to.
Austin:
Totally. Now we want to be greedy buyers when other people are fireside panic selling, and so you want to avoid such a scenario. But in the current environment, we looked at all the different alternative investments and said, “what’s most suitable for not just now, but over the next five, 10 years?” And where we shake out with an environment that asset prices are still pretty high, interest rates on a relative basis are high, the IPO window and the ability to exit investments is pretty weak, and bank lending, the standards are tight and the availability of capital is very low. That dynamic, that set of what we’re looking at really hurts private equity and private real estate because they ideally, they want to buy assets on the cheap and lever it up and utilize low cost interest.
It hurts venture capital investing because they don’t have that exit through the IPO window or otherwise. It actually mostly benefits private credit, if you think about it, there’s five or 6,000 publicly traded companies, there’s 27 million private companies in the US, not all of those have great access to the public financial markets the way that our largest companies do. And so there are ways to finance these businesses that are superior to the public markets, but generate superior returns for investors. And so that’s where we’re focused and we’re excited about some of the things we’re doing for folks in that market.
Meb:
You mentioned two things there that I think are really interesting to me, and we have an old tweet that talks about this, the biggest argument for private is the one you just illustrated, which is just breadth, meaning you have 10 x choices in the private market for businesses and opportunities set. And as a quant, there’s nothing I like more than breadth, and so having the choice of these 3000 stocks or these 10 X, 100 x, how many ever it is, I think it’s 60 times as many businesses than the private markets, is much better opportunity set. So when you say private credit, what does that mean? Does that mean traditionally lending directly to businesses? Is it like airplane lending? Private credit could mean a lot of things to a lot of people, what’s the summary of that?
Austin:
You’re absolutely right, it does. What we’re doing is, we want to access the most sophisticated investors in their most sophisticated vehicles, that’s 0.1. But to answer your question directly, most of what we want to do is direct lending, it actually is where you’re stepping in where a bank says, “I can only loan on asset value, we have someone we’re working with that focuses on cashflow loans, but they’re exceedingly sticky, recurring revenue cash flows and they lend to a fraction of what the purchase price would be in a takeout scenario of those cash flows.”
We like the direct lending model in a lot of different ways. We also like, within private credit, you’re right, there’s also ways to invest in assets, preexisting financial assets in distress or in dislocation or in states of change. So a lot of cases, we’re looking with managers that end up initially buying preexisting securities, but they’re doing it in a way because they expect to refinance or reorganize or do some sort of hybrid thing to become more of a traditional lender.
Meb:
For the listeners out there, either advisors or individuals, how does one go about sourcing these? Is this something where you’re going through databases, is it network? How do you go find private credit? Is it something through mutual funds? Are these only private funds? What’s the process?
Austin:
There are some quasi liquid vehicles out there they’ve created, you mentioned one Blackstone has tried to create, and they have created one for BCRED, which it’s an interval fund, it’s a public availability, it has a ticker you can buy in a certain level, there’s many other opportunities to do this. Those things have some limitations, they’re not fully liquid, they’re limited to other folks getting in and out, there are some interesting opportunities within that space. What we’ve done, is spent a lot more time focusing on the areas of credit that we wanted to be invested and then canvas the universe of managers that offer something in that arena.
We’ve used expensive tools to do operational due diligence on each of these types of managers, find them, understand what they do, we’ve used a lot of third parties help with this. So the answer is, there are easy ways to get most of the way there now that Blackstone’s and Apollos and Franklin Templeton are making available to folks, and those are pretty darn good. What we’re focused on is going right to the source though and creating a structure where our investors can go into the true institutional classes of funds.
Meb:
And are those traditionally lockup periods, how does that work as far as liquidity?
Austin:
Yeah, they are. And I think that the private credit lockups tend to be five to seven years versus private equity of 10 to 12 years, so it’s less onerous in that regard and you start to get invested a lot earlier. So the so-called J Curve of waiting between the time between you commit your capital and your capital’s actually called or invested is much shorter and less steep or just less, you have to wait less time for that, but you still have to understand that your capital is going to be committed. And I think the rationale there is that there does take some time for value to be created, and so you have to be willing to do that. The data though is pretty profound that over the long period of time in many, many decades of returns, that you do get paid for that illiquidity even after paying some fees.
Meb:
What’s been the response from investors? Is it something they’re kind of like, cool, are they excited about it? Is this point in the cycle, do they care?
Austin:
I don’t think I’m the only person, Meb, that’s … well, I know for a fact I’m not the only person that’s talking about private credit. So for the most part, our clients have been very receptive to it, they’re excited about it. On the one hand, for me it’s a word of caution, which is, this is just for part of your capital, we’re hoping to generate equity like returns or near equity like returns kind of low to mid-teens returns net to our investors. We’ve taken a lot less risk because we’re senior secure generally speaking, but it has some limitations as well.
One of the biggest that we want to talk to our clients about, and I think one of your guests recently has mentioned this is, manager selection is mission-critical when it comes to the private markets because the difference between the returns from a very good manager and the returns from a very bad manager are enormous, the amplitude is so much higher than it is in the public markets.
Meb:
What’s the secret?
Austin:
The secret is just two things, one is very simple, it’s diversification, you can’t put all your eggs in one basket. The other is, partner with someone like us that focuses on deep manager due diligence, I know for us, a couple of these things are, we want managers with lots of skin in the game, we want managers that have operational expertise that’s ideal for us in the environments in which they’re lending. We love managers, they’re on fund three, oddly enough, so they’ve got the process going, but they’re not on fund 14 or 15. So we like that where they’ve figured it out, but they’re still hungry. And then we love folks that are focused on a market niche, they’re not empire building, they found a little spot in the market that there’s inefficiencies and they just hone their craft in that little market niche.
Meb:
Hard not to find those empire builders, man, you get the private fund managers and scale is always a seductive carrot. Because if you can add just another zero or two zeros, the math on a compensation goes up by a zero or two zeros. So it’s hard to have the ones that are mindful about capacity.
Austin:
Yeah. There’s one more thing I’d say on it, which is, when you look at the public markets, the public bond market is actually larger in aggregate than the public equity market in terms of asset value. The opposite is true in private markets, private equity dwarfs the size of private credit. So even if a lot of people are looking to private credit, I still think there’s a great opportunity there and one that we think favors private credit over private equity for the next five or so years.
Meb:
It surprises a lot of investors too, and JP Morgan always has these charts of the world market cap and assets, but XUS fixed income is a huge market as well with both sovereigns as well as corporate stuff. Anything else on the private credit before we hop on to some of the other assets around the world?
Austin:
Maybe the last piece is, because banks have pulled back the terms that many of these folks are getting are just fantastic. So it’s sort of a heads, I win, tails, I don’t lose where it’s floating rate debt, so if you think about last year, the fixed rate bonds did so poorly in 2022, most of the private credit did quite well because it had floating rates, but it’s floating rate debt that they’re now able to put in floors in. So if we get in another environment where rates go back down, the private credit folks are not going to see their returns degrade. So it’s a nice spot to be whatever your views are on interest rates.
Meb:
I like the idea of starting a private lender focused only on entrepreneurs. I had one hell of a time getting a mortgage and I have talked to so many in my DMs now and responses to this podcast where people were like, “me too, I own my own business.” It’s impossible to get a mortgage, but I feel like that would be a pretty good niche market, we can start one day. All right, let’s hop around, where do you want to go next?
Austin:
I think that at the core of every investor’s portfolio ought to be world-class businesses and we’re finding ones that are smaller in size to be really attractive where they’re earlier in their life cycle. Meb, you and I have talked about this and Buffet’s written about it, I recently wrote about it, but if you invest in only in the world’s largest businesses, over time, that’s one of the few guaranteed ways to underperform the market. Maybe it’s different now, maybe the magnificent seven will stay the most richly valued and the biggest, best companies by virtue of having just even better returns than the market, but it’s hard to believe that that’s going to be the case.
We’re looking for those companies before everyone else finds out about them. They still have great business dynamics, high returns on invested capital, but world-class management teams that are ethical and have skin in the game and have advantage growth. And so we have a product that we call venture growth that really focuses on those types of businesses.
Meb:
The opportunity set, as you mentioned, changes over time and as a lot of people have detailed with the Russell being down, I don’t know, almost a third from its peak small cap, certainly anytime the P goes down, PE looks better, but on a relative basis. Is this mostly a quantitative or is this tends to be more of a discretionary process for you guys or is it both? How do you whittle down these names? Do you have a list that you’re always targeting? How does the process work for you guys?
Austin:
I’d say it’s both top down from a screening quant basis, it’s also top down from we’re identifying what we think are pervasive secular themes, secular trends in consumer demands, secular trends in innovation and technology. And then the bottom up piece is trying to identify those businesses that can actually benefit from all these things and have those great fundamental stories behind them. The qualitative judgment on management team, for example, is important, understanding will this business model actually take advantage of this secular trend?
One example I gave recently was flat screen TVs, I was in New York City and I paid $4,000 for a 42-inch plasma TV back in 2000 and I thought it was the best thing on the planet. That was a massive secular consumer trend, I’m sure you guys you got yourself a flat screen at some point. Not a single flat screen TV manufacturer made a lick of money over the total course of their investment program in those flat screens, they are now, Samsung is now, but over that first decade, not at all. So those were companies that identified a great secular trend but didn’t have the business model to back it up. So we want to have the top down to figure out secular trends, the quant look at, does the business model seem to print cash and is it growing and make sure it has a good balance sheet and good returns and then we want to understand the bottoms up fundamental stuff as well.
Meb:
Are there any other secular trends as you look at these compounders, these really high quality companies that are front of mind for you guys right now? Do these mostly skew towards consumer discretionary or tech or energy or is it across the board sectors? Is there any specific tilts you guys have either intentionally or unintentionally?
Austin:
We love tech, there’s a lot of innovation there, I think we’re probably underexposed to tech relative to the typical venture growth strategy, we do like software. So the reason for the technology is that there’s the better mousetrap risk, someone always can build technology that makes sure is obsolete. Software is more sticky, so we do like software companies quite a bit, we tend to really like companies that have strong recurring revenues, so building products companies where it’s perceived that the business will go up or down on new construction and really most of it is replacement. So we like those businesses, we like franchise model businesses, we like roll-ups where you can actually generate a good return on the acquisition where there’s an arbitrage between what you can pay for a small guy and then you put it into your model and you have better distribution, you have national advertising, you have better cost of capital, et cetera, those businesses are nice.
We do like the traditional buffet, brands matter, brands can generate really great returns. So for example, in a talk that I recently, I know you were at, I talked about Monster beverages being one of the best performing stocks over the last 30 years, if not the best, it depends on the day. And we found a little company that we think could potentially redo that monster playbook where they have distribution and they’re expanding into other categories and I’m not guaranteeing it, but it’s an interesting little business and they can just follow the footsteps of Monster Coca-Cola and just generate great returns on investment.
Meb:
Are you going to tell us or the investors have to DM you to find out?
Austin:
No, I think I’ll tell you, so Vita Coco, ticker is Coco, it’s nature’s Gatorade.
Meb:
That’s a great ticker.
Austin:
Fantastic business, well run, their cost to capital is low, operating expenses are low. In many cases, coconut water is a byproduct of sourcing the actual coconut for use in cooking and baking, and so they just have a great distribution, they dominate the market in coconut water, which is in and of itself growing, but then they’re looking to expand into alcoholic beverages, pina colada, Vita Coco, expanding into potentially some other types of beverages, more good for you, protein, et cetera. So that’s just one example of the type of thing we’re looking for.
Other people would be surprised at the multiple that a lot of our companies trade at, it’s pretty low. There’s a lot of opportunities that we’re seeing in the industrial complex where companies have fantastic long-term prospects but are trading at nine, 10 times earnings. So Timken is one that we really like, the ticker is TKR, fantastic business, it’s ball bearings and industrial motion, it hits on a lot of different secular themes, emerging markets are traveling more, all that travel requires more engineered bearings, robotic surgeries, tons of bearings, robots around the factory, lots of engineer bearings and industrial motion. So it’s a business that seems sleepy, the ball bearing was invented over a hundred years ago and yet they have a strong competitive positioning, great management team, fantastic return on investment, they have a huge and growing business in India, for example.
Meb:
I love the stocks like that, you just gave us the perfect Barbell, something a little more trendy on the consumer side and then something that industrial, it would probably put a lot of people to sleep, but is one of those classic compounders that has a niche business. One of the things you and I talk a lot about, we like to debate a little bit is, as we think about international and what borders mean in 2023, soon to be 2024, what’s you all’s approach there? Do you cast a net around the globe? Is this US only? How do you think about stocks outside our borders?
Austin:
The short answer to your question is, we do, we absolutely look globally and have a lot of investments internationally. But taking a step back, I think most investors fall in one of two camps, one is, they are predominantly invested in the US and they like it that way. They say, “look, there’s a US exceptionalism, if you just look at it from returns profile over the last 30 years, it’s been better to be in the US than just about anywhere else.” And so I’m going to stick with that and I can appreciate that argument. And then another argument I think that’s maybe closer to your point, which is the demographics are better internationally potentially over time, the more of the world’s GDP is international, valuations are lower and more attractive, and so we should be more focused internationally.
We sit somewhere in the middle, Meb, where I can see benefits of both arguments. I will say that I think the average, the median company in the US is a better company intrinsically than the average international business. And that is a function of two things, one, lots of international companies that are the best companies to side the list in the US, so that’s one piece of it. Secondly, if you look at a lot of really good businesses internationally are not public, some of them are private and many of the ones that are available to us as public investors are in banks which are quasi regulated. They might be quasi-state owned, they’re in metal bending and industrial parts of the economy that are less exciting and less growth and less long-term returns oriented than many of the companies in the US.
And also by the way, lots of parts of the world, the accounting is not as good, corruption may be a little bit higher. So we put it all together and we want to own, and we do own some international businesses when we feel good about management and the accounting and things of that nature. But we also own a lot of businesses that are either mostly international but listed in the US, or they’re US businesses that have fantastic and growing international operations and profits.
Meb:
Look, I think there’s a lot that I agree with. My bigger thing that I come to always is, going back to the beginning part of the discussion, I like breadth, so the concept of there being more choices than less, I think borders are becoming increasingly meaningless to where we did an article that we need to update called the Case for Global Investing, but it was citing some Morningstar research where they were looking at domicile in revenues. And so you can make an argument, and I’m sure an index provider does this, I don’t know if there’s any funds specifically that do this, but where instead of just arbitrarily picking stocks by headquarter location, it’s like where are the revenues exposed? And then you get a different exposure as far as currencies because there’s companies that are listed in the US that essentially have no US revenues and vice versa for different places.
And you start to think about just some of the general trends, certainly looking back, I think a lot of the great tech companies of this cycle have been US companies. You haven’t seen that many come out of Europe or elsewhere, the big ones, but also looking back at the big market cap of the per decade is always to me a zoom out sign on what has done well over time. Because in the eighties, that was Japan, last decade, that was a lot of China and the decade prior, a lot of internet companies on and on. I tend to be a little more agnostic, but I see even if you do the market cap weight, that’s 60% in the US, which is I think 10 times more than any other country, and Japan maybe creeping around in the high single digits as far as global market cap.
I think you can have your cake and eat it too by saying, “even if you follow the market cap weight, you end up with a 10 x exposure to one country bigger than any other.” One of the areas we led off the discussion with that we moved away from was, you were talking about currencies and Rick Rule and thinking about global, I don’t think this word has come up yet today, but certainly when we’re hanging out with the Stansberry crowd, it tends to be a more mindful group of global macro specifically with real assets than most other groups I talk to and outside of my Canadian and Australian friends.
And so when you say real assets, that can mean a few things, can mean REITs, can mean tips, but the big one, the word I was thinking about being gold, which is near all-time high is hanging out around 2000. How do you guys think about real assets? Is that something you include in portfolios? If so, what’s the opportunity set, and what do you guys think about the shiny metal?
Austin:
Maybe taking the last part first, we’re believers that the gold has a place in just about everyone’s portfolio, we see it as absolutely a superior store of value to cash. It has proven its worth over time, you know the old adage that if you went down to Saks Fifth Avenue a hundred years ago and you bought a nice suit, it would’ve cost you around 20 bucks or about an ounce of gold? And if you went there today and you tried to buy a really nice suit and maybe for you, Meb, it might be a little more than this.
Meb:
When was the last time you bought a suit? I wore one the other day, I had to drag it out of my closet and I was like, “man, I hope these things aren’t mothballed and still fit, my Lord, it’s been a while.”
Austin:
But in any case, it would be about $2,000 or about an ounce of gold, so which of those things did a better job of protecting value and protecting your worth? But we don’t see it as a productive asset, gold is a store of value and I think that the same way for other hard assets, if you’re looking at commodities, be they that they are hard or soft commodities, we feel the same way that you may see air pockets where supply is far exceeded by demand and you’ll see these huge air pockets where certain commodities will rip higher and then the markets will correct for that either by virtue of increased supply, reduced demand. We do, in some cases, invest in those commodities.
But apart from gold, what we prefer are those businesses that will benefit from strong markets in those commodities. So we don’t own it for very many clients right now, but we did for a number of years when we saw a strong agricultural market and strong market for agricultural commodities. We owned John Deere, and because John Deere was going to be benefiting far more in terms of its growth and earnings power from the things it was doing to make smart farming, connected farming much better yields per acre for farmers on top of a really strong agricultural market.
And the same goes for oil and gas, we find there are many stock or companies within that space that can do very well and should do very well on an earnings power basis with leverage to strong oil prices or natural gas prices that should over time actually do better than the underlying commodity price. And just the last point, it is a word of caution that we have for folks that the preponderance of their net worth are in these hard assets, they just own land, but they’re not producing an income on it and those things concern us because you will not do as well as owning productive assets.
Meb:
Trying to own an asset which you’re hoping just from the capital gains alone, if there’s no economic argument and there’s no cash flows has always been, and the entire category of art and collectibles falls in that world, it doesn’t mean you can’t make a ton of money in that world and people do all the time, for me, it’s reason number two. Reason one is, you like the art, you like wine, you like whatever these things are, and also maybe it appreciates and historically a lot of them have, but ordering on why you would own it maybe doesn’t fall in and it’s different if you own cash flowing land or real estate or whatever it may be.
As you were talking, I was trying to look up to see if Costco had their gold bars back in stock, but they won’t let me view the price because I’m not a member, I don’t have a Costco membership and I’ve out sprung for one while we’re talking just to see whether their gold bars, they’re in stock or not because that was a great indicator because they were sold out the other day.
Austin:
I think that’s a great point on art or collectibles, cars, that is a scarce asset and so there’s just a supply demand function. So if there’s more people that want that Picasso, they’re not making anymore, so you could see prices do well if you get that supply demand imbalance rate, but it requires that.
And to go back to your original question, they’re printing far more dollars per year as a function of total dollars available than they are ounces of gold per year being mined than total available gold. But it’s still an increasing supply, and so that puts a little dampener on the value of gold. If they weren’t making any more gold and demand was going up, then you’d see prices for gold go up even more than they are.
Meb:
As you look around the world and you’re reading and chatting with other professional investors, what view do you hold front of mind that most would disagree with? Something that if you said at a conference, if you said at happy hour, most people would shake their head and say, “Austin, I don’t agree with that?” Because you wrote a great piece and we’ll put it in the show, listeners, called Investing Truce: Realest Seven Investing Truce, and I think most of them I would have a hard time disagreeing with you about, so I thought they’re all very thoughtful. But what’s something that if you did say it would be like everyone would be quiet sitting around the coffee table?
Austin:
I like when you ask your guests this, I had a list of things that I thought people end up always sitting on one side or the other, and I can go through that, but I think the main thing is I’m a tweener, Meb, and most people sit in one camp or the other and a lot of things, I’ll pick one of these to talk more about. But many investors fancy themselves, either value investors or growth investors, either quant investors or fundamental investors spending their time just investing in debt or just investing in equity or just the public markets or just the private markets. On all those vectors, I am a tweener, I love both, I think having an appreciation for both sides and incorporating skills from both sides makes your investing better.
Meb:
I think you illustrated the whole benefit of having an open mind, which so many investors don’t, they get stuck in their view of the world and if that view doesn’t work out, they get absolutely pummeled. And if it does, great, they’re brilliant and they look back and say how smart they were. But I think becoming asset class agnostic or thinking about in terms of approaches to where you’re at least open-minded sets you leagues above everyone else, just being dogmatic about whatever their approach is extremely dangerous because you can get in these cycles where something can do very poorly for very long periods of time and very long being an entire career, not just a couple of years, but like decades.
Austin:
Well, that dovetails into my last one, which is I’d say most professional investors or maybe just in my seat, investment advisors either or tend to be very strategic with their investing and then hedge fund managers or other types of professional stock pickers or investment managers tend to be very tactical what they’re thinking. So what do I mean by that? Strategic investing versus tactical investing, strategic investing can mean thinking about what the optimal long-term mix of investments are to get you to your end goal. So the classic one is the 60, 40 portfolio, 60% stocks, 40% bonds, this will insulate you in the down years, but it’ll provide plenty of upside in the up years for equity markets. Set it and forget it, you don’t want to mess around with it because if you are out of the market for the market’s best days, you’re going to miss all that upside.
A lot of people sit in that camp, then there’s plenty of other people that sit in the tactical camp, which is that the best way to generate returns is getting in and out of asset classes. Investing is seasonal, so there’s times to own bonds, there’s times to equity, et cetera, et cetera, there’s time to be in international, time to be domestic. I think the answer is both, and we absolutely strive to do that for our clients depending on their goals and depending on their time horizon, depending on their risk appetite. Let me try to explain how we try to do both.
The first thing is, the strategic piece is, for every investor for a core of their portfolio, they need to own just world-class businesses. We talked about that a little bit, but it’s just a nice core to sit on and then you can build from that. If you’re more defensive in your posture or if you want to generate more current income, then we can build on top of that stacks of things that will do that, it will defend and preserve capital or it will generate sturdy current income. But still at the core, you should own those world-class businesses.
On the tactical side, I cannot believe how many investors just sat in 60, 40, 40% bonds coming into 2022 with the prospect of rising interest rates and the prospects potentially of rising default rates. So we like to say, you don’t want to own corporate bonds or really bonds of any kind if you expect rates to go up a lot or default rates to go up a lot. And so we came into 2022 not owning a single bond, single treasury for our clients across any strategy.
Meb:
That’s a pretty non-consensus view, I feel like, and that’s something that you wouldn’t hear that many advisors say that.
Austin:
And I actually would say, and this is not to disparage someone that focuses just on credit investments, for example, but I had some friends that are smarter in credit investments than I am, but they knew going into 2022 that it was not a great time to be in bonds, but yet the mandate of their fund was to be fully invested. So they were trying on a relative basis to be shorter duration, to avoid the things that could have the most be hit if interest rates went up the most, interest rate sensitivity, when the answer was just be out of it altogether.
The other piece of being tactical for us, and what I think is so important is to lower your portfolio correlation. So for us, we try to find certain investments that will do that, that are not as correlated to the rest of the market. The problem with 2022, is so many things were correlated together as rates went up, bonds were down and equities were down. One piece of the public market that we did very well with are merger arbitrage investments.
Meb:
Do you guys do that on your own or are you doing that through funds? How do you think about merger arb?
Austin:
We do that on our own. Again, we don’t feel compelled to be always invested in merger arb. Before Lina Khan lost a bunch of … a year and a half ago, merger ARB was a lot more attractive than it is sitting right now in terms of the spreads that we can generate, but we can still generate some extreme returns and the risk of that investment is that the deal doesn’t close versus anything market related. So we like to identify those businesses or those investments that have idiosyncratic risk, risk that’s not dependent on the rest of the market going up or down.
Meb:
And is that an opportunity set that is particularly well-established right now? There’s a lot of opportunities or is it something that just, it varies based on economic and what’s going on in the world? How are you guys finding it?
Austin:
Yeah, it varies, the two dynamics that make it vary are, one, how many deals are being announced and being done? And so if you’re in an environment where not many deals are being done, then there’s obviously a smaller opportunity set. And then the other piece is, Microsoft acquired Activision for $95 a share in cash, in certain environments, Activision was trading at $50 or $60 a share before that deal was announced. In some environments, that Activision stock will trade all the way up to $92 a share and be really tight to a tight spread. And in other environments, because the risk is perceived to be higher or the opportunity cost is higher, it may only go up to $70.
We like, obviously, when spreads are wider, when the market perceives there to be more risks of that deal closing. And then those are situations where we get more heavily invested, we’re coming out of one of those periods where it seemed like deals were not going to happen. Twitter, for example, wasn’t going to close, Activision wasn’t going to close, there’s some healthcare deals that didn’t feel like they were going to close, they’ve closed. And so the spreads have tightened up a little bit because of some of the bigger deals have successfully closed. We found some other things that we’re looking at though, and another piece that we do is we try to identify companies before they get acquired, and we’ve had success doing that as well.
Meb:
Good, let me know, I want to know who they are when it happens.
Austin:
Yeah.
Meb:
What’s been your most memorable investment, good, bad in between, anything come to mind?
Austin:
I did run a hedge fund that was seated by Julian Robertson and Tiger Management and we got started in 2009 and we had a good five-year run and one of the first investments we made and it became one of our largest ones.
Meb:
And what was the focus of the fund?
Austin:
We were long, short, fundamental investing, both my partner and I had private equity experience and we also had experience investing in credit. So even though we were more focused on equities, we felt like we had expertise up and down the cap structure, and so we were going to also be invested in credit, not just equities, which is a little bit different of a flavor than some of the other Tiger affiliated funds.
One of our first investments, one of the first things we looked at, this is early, this is April of 2009, market is starting to come back, but fear and loathing is still the predominant feeling in the market. We spent a lot of time looking at Domino’s Pizza, and it was initially because there was a credit facility that Domino’s owed that was trading at a huge steep discount to par and we felt like, here’s a business. And so for folks, one business I really like are capital light businesses, capital efficient businesses.
Domino’s is a business that most of its restaurants are franchised and operated by the franchisees. So at the time, it had about 225 million of EBITDA of earnings before all the other stuff you attack against it. It only required less than $20 million of capital investment. So very asset, light, capital efficient business. And even at the worst part of the downturn, Domino’s Pizza was still making money, so we were like, “this could be a really interesting situation where we don’t have to take much risk, we’re just going to invest in the credit and at a steep discount to par,” and we thought we could get high teens returns on that. We could never buy that credit, and it turned out that the company was buying back its own credit, it was a weird credit facility, but we learned that over time and it got us actually more interested in the equity.
Lesson number one, was understanding the beauty of capital efficiency, and then we started doing more and more work on this business. The second lesson is that, gap accounting has real weaknesses and provides what I would say quant model blind spots. So Domino’s Pizza is a company that had negative book equity value on a gap basis because the gap accounting doesn’t provide any value for the franchise agreements that it had with the thousands of franchise restaurants that it had. These things are super valuable, they pay Domino’s Pizza loads of value on the top line in terms of revenue share and no value ascribed to it. So we saw something that was super valuable that the quants and Bloomberg and gap accounting didn’t have it, started spending time with management and realized they were turning this business around from a fundamental perspective. They were investing in technology at a time when everyone else was still calling up on their phone, phoned it, order a pizza, they had the pizza tracker, they were improving the quality of the pizza, their marketing campaign was killing it. So we started to get really excited about this.
And so lesson two was, you can find there is informational edge to be had when there’s gap accounting weaknesses or quant model blind spots. So we were buying shares of Domino’s in 2009 at $7 and 50 cents, in a year, it doubled, in another year or a little more than a year, it doubled again, we thought we were geniuses. And lesson three is, what may have been the best investment of our careers probably was the worst sale of our careers because just as people were starting to figure out how great a business model this was, we had seen this thing double and double again, we started peeling out of the business over time and eventually sold our shares 45 $50 a share, it’s at $350 stock now.
Meb:
Such a piker, man, that’s the challenge on these big winners.
Austin:
Yeah, let your winners run, I think is the final lesson for me and memorable. So it was both confirming the work we did could really drive value, but also a lesson on what not to do as well.
Meb:
My favorite is the chart showing Google versus Domino’s since inception stock returns and it’s always surprised people that pizza has been the better choice. I’m still not there on Domino’s actual pizza, it’s my wife’s number one, as soon as I go out of town, I see Domino’s light up the statement, but I’m a-
Austin:
Our kids love it.
Meb:
… Awesome. Where’s the best place people want to find you, your writings, what Sam is up to, where do they go?
Austin:
Stansberryam.com is our website, that’s Stans and then B-E-R-R-Y, am.com, you can hit us @info@stansberryam.com as well.
Meb:
Thanks so much for joining us today.
Austin:
It’s been fantastic, Meb, thank you. It’s been great and I enjoyed it and hope to see you either at a UVA basketball game or maybe at one of these conferences soon.
Meb:
Podcast listeners, we’ll post show notes to today’s conversation @mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at feedback@themebfabershow.com, 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.
