In this hedge fund manager’s search for stupid-cheap stocks, no destination is too far flung.
Rather than get caught up in the same noise of the same market as everyone else, Harris “Kuppy” Kupperman sets his sights on companies and industries the world over—looking for the unloved… the ignored… and the misunderstood.
Learn where and what this global investor’s got his value teeth into now—and how he manages his portfolio to take advantage of these oft-missed opportunities [14:52].
And if the interview leaves you wanting more, you can read all about Kuppy’s exploits on his free blog, Adventures in Capitalism.
The Mike Alkin Show | 62
Global investor reveals how to take advantage of oft-missed opportunities
Announcer: Free and clear of the chatter from Wall Street, you’re listening to Talking Stocks Over Beer, hosted by hedge fund veteran and newsletter writer, Mike Alkin, who helps ordinary investors level the playing field against the pros by bringing you market insights, and interviews with corporate executives and institutional investors. Mike sifts through all the noise of mainstream financial media, and Wall Street, to help you focus on what really matters in the markets.
And now, here is your host, Mike Alkin.
Mike Alkin: It’s Monday, June 3rd. Welcome to the podcast. Hope you had a good Memorial Day weekend. Mine was nice. I didn’t do the podcast, so that was, you know, I missed doing that, but besides that, it was good to have a little bit of downtime. Got some work done around the house, just kind of relaxed and just hung out with the family.
And then, this weekend, had a good weekend. I don’t know if you remember the movie “Old School” where Frank the Tank is talking to a bunch of kids where he says, “Yep, got a big weekend planned, going to go over to, you know, Bed, Bath & Beyond and do a few things.” Well, I didn’t do Bed, Bath & Beyond, but those are what my big weekends are is having plans to go to the Home Depot or something.
And the Home Depot, I got to tell you, I just, you know, I’ve been married 25 years this coming July. I was on fire, we were having a … speaking of that, Friday night? Yeah, Saturday night, we were at our neighbor’s house having a barbecue, and my wife said, “Quick, what’s our anniversary date?.” She said, “It’s 25 years.” She was telling all the women. “What’s our date?” And I had it. She said, “Oh, I didn’t even know you knew the day. I thought you had to look it up. So, there you go. I got that right.
But [inaudible 00:02:04] the Home Depot, and after 25 years you have, you know, your spouse kind of knows you, and I have this thing. When I go to Home Depot, I can’t help myself. I walk around. I go in and get one thing. I was going there because I was just doing a little touch up painting, so I had to go and get a roller, and a brush, and do whatever.
But a five minute trip turns into an hour, because I wander over into the garden section, and I see this, that, and the other things, a couple of tools I get. Then I wind up over in the drill section, or the saw, where the tools are.
And if you know me, I can’t do a thing. I mean, I mentioned I had 25 years coming up. When my wife and I were dating she was living at home, and she has a bunch of siblings, and the house wasn’t big, and she didn’t have enough closet space. She needed an extra rack. So, I said, “Oh, I’ll build you one,” you know? I was still in the trying to impress stage.
And so, I went out to the … I think it was the Home Depot, it was the Home Depot, and bought some lumber, and went in to her house. Now, her dad’s a very handy guy, but she wasn’t home, and I went upstairs into her room, and I brought my tools with me, and I’m up there.
Now, I literally have no idea what I’m doing, and I can’t put anything together. I can’t make anything. I can’t build anything, but I always try. So, after about an hour and a half, two hours, and hearing the sawing and everything else, he comes upstairs, and he goes, “What are you doing?”
And I said, “Well, I’m making a rack.”
“You got to be kidding me.”
Said, “No, I’m making a rack.” He was laughing. Anyway, it looked like something that [inaudible 00:03:48] Rascals would have put together, but I got an A for trying.
Fast forward a few years later, and I don’t know if I’ve told this story before on the podcast, but many years later, now my wife and I are married, we have our first child, and I’m going to put together, I think I did actually tell it, but for those of you who haven’t heard it, I think I’m going to put together my daughter’s little tricycle.
Here I am. I spend hours and hours putting it together. It should have taken anyone with any skill a half hour, but it took me forever, and we were living in Manhattan at the time, and my in-laws are way out on Long Island, I think it was my daughter’s birthday. And we put it in our car, and we drove all the way out to my in-laws. We were staying there for the weekend, and we had … My daughter was showing grandma and grandpa that, you know, our daughter’s going to ride her new little bike.
She gets on the bike, literally, the wheels fell off. The handlebars fell off. Everything fell off. And so, my father-in-law said to me, “You are never going near anything with my grandchildren again. I will put everything together.”
So, the way it’s worked, now my kids are older, so we don’t have to put things together, but for a decade my father-in-law would come in right before Christmas, put all the stuff together, and I didn’t have to do anything. So, it kind of worked out well.
Anyway, that was this weekend, and my wife and I have a little routine now. So, I go, I spend all this time, I buy drills, I buy saws, I buy pneumatic stuff. I don’t even know what they are, but you know, I figure one day, if I’m in there, I see a tool that’s kind of cool, I’ll buy it, I’ll bring it home, and maybe one day I’ll use it. I won’t successfully use it, but I’ll use it.
And then, invariably, what winds up happening is I get a thought, I go look for it, and it’s gone. And I say, “Where is that?”
She said, “I brought it back.” And what winds up happening is I buy these tools, I bring them home, I put them in the garage, and then she goes in, and when she’s going to go around, and she’s going to be near the Home Depot, she takes all the tools I buy, and knows I’m never going to use them, they’re still in the box, and she brings them back.
So, we got a nice little routine. I feel good because I bought them. She knows I’m never going to use them. She returns them, and everyone’s good.
So, aside from that, for the weekend there was a lacrosse tournament. It was very interesting. I go to lacrosse tournaments, and my son’s a goalie. He plays defense and goalie, throughout the years, but he’s morphing into much, he’s a really good goalie.
Anyway, so in the tournament that they played, I said [inaudible 00:06:15] before we left, I said, “I’ll tell you what, buddy, if …” You know, he’s 13. I said, “If you get three shutouts, I’ll buy you whatever you want.”
And my wife said, “What do you mean, whatever he wants? Why are you buying him whatever he wants?”
I said, “Oh, it’s fine. It’s lacrosse. They save one out of every two shots. That’s a good goals against … It’s not like hockey where, you know, 93% is what you’re … 90 is off the charts.” And I said, “It’s impossible.”
So, we go to the tournament. Game one, shutout. Game two, shutout. So, now all the dads, what happens at these lacrosse tournaments, you’re there all day, and the team puts up a big tent, and there’s, I don’t know 50 teams at these things, and all the parents are close and friendly.
And so, you know, word got out that Jack’s going for the big, big third shutout not, and if he gets it, he gets whatever he want. Now, it’s kind of open ended, so, I mean, within reason. I mean, I’m not going to spend more than a little bit of money on it.
So, now here we are in game three, and there’s three minutes to go, and he’s still got a shutout going, and he’s on fire. I mean, there are games where he’s not. There is games where he’s, you know, he’s got his head up his butt, but there are, he’s got the skill set to do it, but you know, he’s 13, so sometimes, you know, his mind’s wandering, but he was playing great.
So, now all the dads are yelling out to the field, you know, “Jack, what’s your dad getting you?” You know, he starts thinking about it.
And so, one of the dad’s said, “Listen, you should go up to one of the defense men and give him like 20 bucks. Tell him to, you know, blow the coverage, and you won’t have to do.” Everyone’s laughing and joking, of course.
But anyway, little less than a couple of minutes to go in the game, a kid takes a shot, it deflects off another kid, it hits the post, and there’s a guy standing there, and he dinks it in. So, phew, I got off the hook there, because who knows that the kid would have wanted? But asides from that, it was pretty good.
But the other thing, these tournaments, they overbook these things, so they’re, like I said, 50, I don’t know, I’m guessing, 50 teams? And so, the facility is huge. I mean, think about how big, I think they have nine fields going at one time.
But the parking was limited. So, we had a choice, you know, the sheet goes around each week, what parents are going to bring what to the field, and we had a choice between bringing chips and Goldfish, or the grapes, or the … you know, the healthy stuff, and then there’s a few snacks you bring, and my wife signed me up for the ice, the water coolers, and the water.
I’m like, okay, well, that’s fine. Somehow I’ve morphed into the ice water, cooler, and water guy. If you bring the Goldfish, or if you bring the chips, it’s pretty east. You bring the water, the ice, it’s a project. You got to go get cases of water. You got to get the ice. You got to go to 7-11. You got to load it in, thing’s heavy. But that is what it is.
In this particular tournament there was no parking. I had to park about a mile and a half away, on a road, and I had to take this cooler that probably weighed, I could barely get it into the car, I don’t know, 60, 70 pounds, full of water, and Gatorade, and ice, and I had to carry it over grass, sandy stuff.
It took me probably 30 minutes in blistering heat, and here, if you could have seen me, you would have been laughing, because I’m stopping every, I don’t know, every 200 feet, and shifting arms, because it was like dragging, I felt like I was trying to walk through sand.
And anyway, got there, my arms are on fire. I’m burning. I’m ripping. I’m so pissed off at this point. It took me a good half, 45 minutes. You know, I’m blaming the tournament organizers. I’m going to call them. How dare that set this thing up apart, all the rational stuff, right? I mean, who cares? Stop being a wuss, Mike.
But anyway, that was my weekend. They played well. They won the tournament. It was all nice, and here I am, back at it. We’re getting back, settled again into a … it was nice to have a few days, a weekend, always recharge.
You might hear a new noise now, if you’re listening to the podcast, and what I did is, so, because of, I invest in a lot of different countries, and I look at companies around the world, and you know, with uranium in the fund there is always something going on somewhere.
So, I’m pretty much at, it almost feels like it, although it’s not quite, but 24/7 there’s something going on where, you know, I’m always thinking, so, you know, I’m talking to people all the place. What tends to happen is I, I am not technologically proficient, so I fill up my calendar as, you know, I get invites to do a call, I click accept, it goes into my calendar, and I may very well forget to look at that calendar, because I still write it down.
But a lot of people use, they use Zoom for conference calls. I mean, there’s all different technology and stuff, and like I said, I’m relatively impatient and clueless on that stuff.
So, my friend Chris MacIntosh, who runs a fund, and he also runs Capitalist Exploits, which great, great, we’re going to talk about that in a bit, but he’ll send me his availability on a calendar. He’ll text me and say let’s talk, here’s, you know, what’s your time look like, and he’ll send me the … it looks like something out of the space age. He’s got this program that fits in. It’s got all different time zones. I look at it, and I draw a blank, and I just say, oh, just, oh God, let’s just get on the phone and figure out when we could really talk.
But anyway, so he keeps track of it, because I can’t keep track of the hours in my head and all that stuff, I went out, and I went on Amazon, and I got newsroom clocks. You the kind, it says London, Sydney, Moscow, New York, all that, looks cool, and I bought, and Hong Kong, so I bought five of them, and I hung them on my wall. They haven’t fallen. They haven’t fell off yet. I’m sure they will, because you’ve seen me trying to hang them.
But they’re there, and what I realize, they’re clocks with a second hand, and the thing I didn’t realize is, you know, I have a nice, nice quiet office, and they’re all out of sync, and you hear it just constantly ticking, tick, tick, tick.
So, Garrett, my sound engineer, just said to me in a … we had a brief second, he said, “What’s that noise?”
I said, “What are you talking about?”
He said, “What’s that noise?” I realized he’s picking up the second hands ticking. So, if that’s it, I apologize, but I need it, because it needs to keep me, here, New York, Moscow, Sydney, London, Hong Kong. Now I know who it is. I know who I’m talking to. At least I have a sense. I have a visual, so it helps me.
Anyway, I think you know that, if you listen to the podcast, that I like what’s not popular, on both the long and short side, or I like what’s popular on the short side, it tends to be, and I look for things that people have given up on, don’t like, you know, left for dead on the long side.
And over time, and over the years, you kind of morph to people in the industry, other investors who think like that, right? And I also do have friends who have very opposing views, because it’s always good to hear how they think, and I have some friends who are huge growth investors.
It’s great, because it reminds me how people think about things, and how you can dream up a story, and the story can have legs, and go on for a really long time. So, it’s great to always hear opposing views, or just different ways about it.
But when you want to get into your little circle of trust, your little comfort zone, you know, you tend to gravitate towards those people who are somewhat like minded in terms of idea generation and what not. It helps a little bit. And so, we’re going to bring someone on today, and we’re going to … I’m going to tell you all about, let you tell, let him tell you about his story, and we’re going to kick it around, and I think you’re going to enjoy it.
His name is Harris Kupperman, and he’s affectionately known at Kuppy, and he runs a fund, and he also runs a great, great blog called AdventuresInCapitalism.com. And he’s, it’s hard to pin him down because he’s traveling all over the world all the time, but we’re going to get him on right now, and Kuppy, welcome to the podcast.
Harris K.: Hey, thanks for having me on.
Mike Alkin: Yeah, you bet. So, you and I, we met through a mutual friend of ours, a guy with a funny accent named Chris MacIntosh. He’s also one of the funniest guys I know.
Harris K.: Yeah, he’s a great guy.
Mike Alkin: Those who, you who don’t know, I’m sure you do, but if you’re listening, Chris MacIntosh, he’s a fund manager, and he also runs Capitalist Exploits, a newsletter that’s just fantastic, and you know, Chris is a really big thinker, and he’s a great read, and he’s very funny.
So, Kuppy, tell us, so you run, you do a couple of things. You’re a fund manager, and you also have a great website called Adventures in Capitalism, which is just a great read, and you’re very generous with how you share your information, and what your thoughts are.
But tell us about you. Tell us about the businesses you run, and tell us about, you know, how you got here.
Harris K.: Yeah, sure. So, as you said, I have Adventures in Capitalism. I also run a hedge fund. I’d rather not talk directly about it, but if you want more information, you can reach to me through my email.
In terms of how I got here, back in high school, instead of going to class, I was trading stocks. I just found it much more interesting.
Mike Alkin: Right.
Harris K.: Yeah, yeah, to my parents’ frustration, and it’s kind of just evolved from there. You know, I’ve learned over time, I’ve been doing this almost 20 years now, that, you know, you can find opportunities in the stock market where stuff is just mispriced, and if you can find one of those opportunities, you can make a lot of money. I just found that a lot more interesting than learning in school or anything else and believe you can self-teach yourself almost anything.
Mike Alkin: Yep. So, from there, when did you, did you start work institutionally, or from there how did you that? How did you morph into running a fund and doing the newsletter?
Harris K.: Well, I started a fund out of my fraternity house, actually, in 2003, and it was myself, my father, and my best friend from middle school. Those were the only three investors we had, and it just kind of evolved from there. And, you know, there’s been some ups and downs, but it’s been amazingly successful over time.
Mike Alkin: So here you are, you’re a high school kid trading stocks, and now, all of a sudden, you’re running a fund. And I read your stuff, and you’re like, you’re a big thinker. You have a contrarian bent to you. You know, you go anywhere, it seems, and you’ll look at anything. You travel a lot.
Talk to us about how, from where you started, to how you kind of molded an investment philosophy, and what the investment philosophy is.
Harris K.: Sure. Well, I think you have to move with the times. The market’s not static, and that’s why you see a lot of these guys, they keep talking about, oh, I used to be great 10 years ago, or 20 years ago, like there was this magical time where money came out of the sky, and every investment decision was right, you know?
Mike Alkin: Yeah.
Harris K.: People talk that way, and I think it’s because they learned how to invest during some timeframe, and the market’s evolved, whether it’s market structure, or where the evaluations are, or whatever else, and they haven’t evolved. You have to evolve with where the market is, and go where the opportunities are.
And, you know, if you look at where the opportunities are today, they’re very different than where they were when I first started. When I first started, you could go out there and find a bunch of small cap growth companies, and these things were 50 to about 200 million market cap, and they were growing like mad, and because they were liquid, or because they were below the radar, and they weren’t part of indexes, you had these things that were trading like four, five, six times cash flow, and they were growing revenue 50% a year.
It was hard not to make money, quite honestly. I mean, all you had to do was actually do the work, and you’d call up these CEOs, and you’d be the first guy to call them all year.
Mike Alkin: Yeah, exactly.
Harris K.: And even if there wasn’t the greatest liquidity, maybe it was 50 grand, maybe it was, you know, 100 grand a day, but that was enough for my purposes, and I was able to build a portfolio of these sort of positions, especially coming out of the mini recession in 2002, and just made a fortune at these things. And as soon as they got big enough they got added to the Russell 2000, and the S&P 600, and every time you had that inflection of institutional capital coming in, these things just exploded in multiples.
I mean, it was just so easy, it’s kind of funny when you look back at it. And then now it’s kind of depressing, because you look at anything that has any growth at all and it trades not even multiples of cash flow, but multiples of revenue.
It’s just because you have these computer programs that realized what I did when I was doing this in high school and my fraternity house, that if you have a company at five times cashflow growing 50% a year, unless something goes horribly wrong, or the people that are running it are criminals, you’re probably going to make a lot of money, and a big basket of them is definitely going to make a lot of money, and-
Mike Alkin: Well, it’s funny then too, you know, back then capital was a little bit harder to come by for companies, so now it’s like capital’s everywhere, it’s abundant. So, who cares, like you just said, they look at multiple of sales, because nobody cares about cashflow, right? I mean, at times.
And it’s interesting, because I was reading one of your things, and it made sense. You talked about this, the Ponzi scheme companies, right? These basket of these growth companies where is no cash flows.
So, talk about how you think about that as you see it more from post 2002, 2003, because I was on both sides of that. Late ’90s I was short a lot of these internet companies. You know, somebody would put up a website, and they’d, something dot com, they had no ability to ever generate cashflow, but they had huge multiples. They turned into multibillion-dollar companies, and most of them disappointed. And-
Harris K.: Yeah.
Mike Alkin: Right, but you get run over on the short side early on in that theme, so you got to recognize, you know, which, here I am, 20 some odd years later, you recognize when you want to sidestep these things until after they start to collapse.
But you go through these periods in investing where, you know, what we’ve seen in the last decade now. I mean, we’ve had this low interest rate environment, where capital is seeking returns, and you get these situations where companies can just keep growing, and growing, and growing, and all of a sudden the valuation metrics change, right?
It is, if they don’t generate cashflow, then you get [inaudible 00:21:16] them on something else. Well, it may as well be multiples revenue.
So, how do you morph, when that’s taking place, how do you decide, okay, I’m going to participate in that, or I’m going to sidestep that, or I’m going to take the other side of that? How do you think about that when you see where the market’s going, but does it, maybe it doesn’t click? Maybe you say okay, I’m not, I don’t want to participate in that because of these principles I have, these rules I follow. I mean, how do you, what’s your foundation for that?
Harris K.: Well, I mean, I just can’t participate. I think of everything in terms of valuation, and if a company is 10 or 15 years old, which a lot of these unicorns that are coming public now are, I mean, if you can’t get to breakeven by year 10 there’s something wrong with your business.
And, I mean, people forget that Amazon, which is always the example they use, it kind of ran break even for most of its time. It, I mean, it had some losses, then it ran at break even, now it’s profitable, even have losses like WeWork, where they’re losing as much as their revenue each year.
Like, Amazon just didn’t run that way, and I think when you look at a lot of these guys that are coming public now, where every year the losses accelerate, and they’re to operating leverage or scale, I mean, they’re not really businesses, they’re just stock promotes.
And we saw this in 2000, like you say, and shorting too soon is dangerous. That’s why I haven’t really talked too much about it on my site until quite recently, but the failure of the Uber and the Lyft IPOs kind of was a game changer to me, because you look at some-
Mike Alkin: Huge.
Harris K.: Yeah, you look at something like Uber, and something like two thirds of the shares outstanding were purchased at a higher price than today, most of them by VC guys two, three years ago. And, you know, where does money come in to support the continued growth? And then the other question is, a lot of these guys want out, and who’s going to absorb those shares?
This is something that we learned in 2000, and I made a fortune at this, is shorting the unlocks. You don’t have to time it quite right. You get a list of where the unlocks are, you get shored a few weeks before, and some of them will squeeze in your face for a bit, some of them won’t, but when the float expands dramatically, you’re probably going to make a lot of money.
Mike Alkin: So, Kuppy, I’m going to cut you off for a second there, just because some of the people listening might not understand that concept, but what Kuppy’s talking about is, you know, the people who own these stocks before the IPO, they’re restricted when the stock goes public, and there might be a period of time where they, you know, six months later, where they are then able to sell their stock, but they got in at a very, very low price. You know, who knows? It could be a dime, it could be 20 cents, and all of a sudden, who knows where the IPO goes off?
And at some point in time, when everyone is going to start, when they’re unlocked, and they can freely trade those shares, it doesn’t matter if the stock is down 20% from the IPO, or 30% from the IPO, or if it’s just going down, because they paid basically nothing for it, for many of these investors.
So, that’s what he’s talking about when he’s saying the unlock period. And money flows determine which way these stocks are going to trade, and when you start seeing that selling pressure it can really be quite traumatic.
And yeah, you’re right. I mean, these unicorns that are, you know, I remember when a unicorn used to be a billion dollar company, right? That was in the good old days. But it creates this whole environment now.
But you still have these market valuations in silly con valley that, you know, we yet, really, haven’t seen the adjustments down yet. I mean-
Harris K.: It’s coming.
Mike Alkin: It’s coming.
Harris K.: It’s coming.
Mike Alkin: Right. So, talk about that. Talk about how you view, like, the technology sector. What is it, tech now is 23% of the S&P or something like that, and you’ve had just these crazy valuations, and people think that they’re just going to keep going up forever.
So, how do you, I know you’re now an aggressive short seller. You don’t short a lot. But how do you, what makes it tick for you, where you say, you know what? I’m going to capitalize. I’m going to express my view to where I could benefit on the downside here.
Harris K.: So, I don’t short much. Shorting is dangerous. You can lose a lot more than you could make, and it’s quite honestly difficult, and the idea, I mean, if you can find a good small business, or something on an inflection, you might make a few times your money, and with shorting the most you can make is 100%.
So, I really don’t short. I buy puts sometimes, and right now I only have one position, that’s Tesla, with the view that if the Ponzi sector is going to blow, which I think it is, I mean, Tesla’s obviously going to blow first.
I’ve been looking at SoftBank. I think that’s another. I mean, it’s kind of like the anchor investor of all the Ponzi schemes.
Mike Alkin: Absolutely. I mean, it’s an ETF of all of these unicorns.
Harris K.: But it’s even worse than that, because it’s a leveraged ETF, and then I think a lot of the values that they’re using to collateralize their debt are them marking their own book up. I mean, we had this, people haven’t done this very much lately, because it’s illegal, but you used to have this a lot 15, 20 years ago, where mutual fund groups would just mark their book up. They’d get a big allocation, the IPO, they go into the aftermarket, and they just walk the stocks out.
And especially when it’s thin floats, and you have a lot of VC guys who control most of the shares outstanding, these mutual fund groups would be able to walk the stocks up dramatically and show huge performance numbers, have more inflows, and then just walk more stocks up.
And then there’s kind of the quid pro quo that they’d get out sort of right before the unlock, because there’d be a bunch of upgrades and stuff, but you know, it was just blatantly illegal. And what you see guys like SoftBank doing is effectively the same thing, but they’re doing it in a private format.
I mean, if they’re the only one buying WeWork, and they set the new valuation of incremental money of a business that really needs incremental money every so often just to make payroll, then they should be able to negotiate great terms. It’s not, it doesn’t seem like it’s a competitive bidding process, because, I mean, they’ve done all the deals, and they should be able to get better terms, preferential terms, whatever it is.
Instead, it seems like they pay more each time to be all the deal, and I think they’re doing that to mark up the valuations on purpose, and they’ve done this in lots of their stocks in order to borrow more debt from kind of retail Japanese investor types.
And I do think the whole things going to blow. And, you know, I don’t like shorting thin float stocks, and I don’t like shorting kind of crowd favorites. You need something with a catalyst, and debt is always what causes one of these Ponzi schemes to unravel, because without debt you don’t need that much incremental capital to keep it going, but-
Mike Alkin: Exactly, keep it going.
Harris K.: … I mean, when you have debt you have a crisis of confidence. You can’t roll the debt, the whole thing blows. Or, you know, even if interest rates are very low, like they are in Japan, if your collateral values drop, you can’t roll your debt. So, debt usually is what ends the party.
And so, I’m looking for these sort of Ponzi scheme that aren’t just growth companies, but have heavy debt, and Tesla fits the bill because they have more debt than anyone can imagine, and I think the same thing with SoftBank. I don’t have a position yet in SoftBank. I’ve been spending a little time on it, though.
Mike Alkin: You know it’s funny you talked about popping. First 10 years of my career, I was a dedicated deep dive forensic accounting short seller. So I mean, I know about getting run over, being early and … I mean, it’s a tough business. But you have to do primary research, especially really deep research.
And it still doesn’t mean anything if the market’s going against you sometimes until that catalyst comes. The timing’s hard, the whole thing’s hard. But you know, you mentioned popular shorts, right. And that’s where you really can get run over. And Tesla was one where I looked at it for a few years, and I can’t do it, because it’s too crowded, it’s too popular. It’s such an easy bear case, but nobody cares.
Until last summer when I just said, I can’t watch this anymore. I have to participate. But that is, you know, the thing that people don’t realize, and I see this because, like you I’m on Twitter and you see sentiment. And it’s amazing though, at this point in these cycles, where these big growth stories and you’ve got these investors outside the institutional realm. That even the institutional guys get caught up in it sometimes where people don’t look at the capital structure.
And they don’t realize, okay, you know, I don’t care, I think Musk is full of shit. Personally, I think the company should have stayed with building a model S and X but people don’t realize you are what your capital structure is. And when your cash flows can’t support the capital structure, it’s game set match.
And I think people lose sight of that. At some point, you know, to your point from the short sight, from leverage capital structures, you just can’t outrun those things. And sooner or later, it’s going to come home to roost. And it’s fascinating to see where you talk about your inventions in capitalism, I think you have one back in March you call it time to sell something. And that’s what you’re talking about. Right?
Harris K.: I got the time pretty right on that one. I’ve just been lucky on timing. I don’t call myself a market timer. But I mean the market was just up 25% from the lows, and it happened all in six months. If you don’t sell something up 25%, then you’re an idiot.
I mean the world’s evolved bit more. And I think we’re in more of a choppy sort of world where geopolitical events move the markets dramatically, and you need to have fresh liquidity because someone somewhere globally is going to do something that’s going to lead to some sector getting, punched in the face, and you’re going to have a chance to buy something really cheap.
And that’s where, we’ll talk about my personal strategy. That’s where my strategies’ evolved from and to. It went from small cap growth to finding something that’s been punched in the face and figuring out, you know, if it’s cheap or not. And I just have to do a lot more of that, it’s much more time intensive, because you do a lot of drive buys of lots of stocks, you don’t learn really fast.
But because of the institutional mindset right now and this desire amongst fund managers not to show losers and [crosstalk 00:31:15] Yeah you have that. You also have these [inaudible 00:31:17] computers that if something’s down, they know the institutional guys need to keep selling, they keep pushing it lower.
And these things feed on themselves, and reinforce themselves. And you end up with massive overshooting of stuff to the downside, especially because the number of actual fundamental investors in the equity markets has shrank. So you have a lot of these situations where something gets below this called billion dollar threshold, and it just keeps sinking because there is no logical end buyer for it anymore. Hedge funds can’t buy it, because there’s no catalyst this month.
And with no catalyst, they can’t own it, because they had to be, you know, showing positive performance each month. Institutional investors can’t buy it because it’s just too small below their thresholds, whatever. Index funds ETFs, they can’t own it. They’re the ones probably selling it. There’s just no logical buyer for something once it gets below a certain size and just keeps leaking lower, often, surprisingly lower beyond what you would ever think was possible. And it gives you some time to learn these things.
And it also gives you some time to build up a position at the right price. And you got to be patient, they usually dead money for longer than you expect. But when they recover, the recoveries are quite dramatic.
Mike Alkin: So I started a hedge fund business in the mid 90s. And I’ve said it on the podcast. And when I’m talking to younger people, I tell them, you know the difference and why hedge fund performance lags the last decade. But even before that, it’s the institutionalization of hedge funds.
And you said something real there, it’s good they can’t own it, because it’s not going to go up this month. And that, to me is one of the biggest alpha generators, it’s understanding who can be on the other side of the trade, what the incentives are.
And when I first started the hedge fund business, investors and hedge funds were mainly high net worth folks, it had not really caught on yet. And then the late 90s came and the internet bubble came and the hedge funds outperform pretty dramatically. And then you started seeing the institutional money flow starting to really come in mass and the endowments and foundations.
And all of a sudden, what was hedge fund managers in the 90s, they were like cowboys, but they were risk takers, big risk takers, out-sized returns and volatility was relatively high. You can’t outperform and have no volatility. But as the institutions came in, and there was all these, these box checkers that came in, we would call them and they would come in and interview you.
You had to put together a 40 page due diligence questionnaire to answer for them, right. You know what the DDQ’s are. And all of a sudden now … but the assets growth was so big. So much assets came in at just the management fee. Not the incentive fee but the management fee itself was making hedge fund managers a shit ton of money.
So you didn’t want to lose that asset base. So you kind of conform to how they wanted you to manage the money. And that has really changed but for me as [inaudible 00:34:19] now here we are 20 years on, it’s created this abandoned sector. You talk about sub billion dollars, and in industries that aren’t working, there’s so many opportunities, you just have to be patient.
Talk about how you generate your ideas, how you think about, because it’s a blank canvas, right? Where am I going to go look and what is it that triggers an interesting idea for you.
Harris K.: So I’ve said this before, I’ll say it again, my best ideas usually come from my own friends. I’ve been very lucky that I have a lot of smart friends. And I’m so fortunate they share with me. And the absolute best ideas are the ones where one of my friends says, “Man, this stock is so cheap, but we hit our internal position limit, you should go look at it. I’m down 30 or 40% on this.”
And I think to myself, “Wow, a really, really smart guys down 30%. I could buy it for 30% less than he paid,” and it makes me excited. Because he’s done all his due diligence. He’s done all his work. I mean, this is less than I have to do. I have to obviously check it all over. But I can basically go through about 20 of my friends and cherry pick their best ideas and buy it for less than they paid.
I mean, how can you not make money?
Mike Alkin: Absolutely.
Harris K.: Going back to this institutional world because you got to always figure out where’s value and why. And there’s a lot of really smart people in the stock market. So for you to go in there and say I have a contrary and differential view on this stock, I mean, that’s not good enough. You have to really know why no one else has bought it with their contrarian view. And you’re right, it’s this institutional world that’s told these portfolio managers, we’re going to give you a billion dollars to spend, you get to make 2% management fee on this, but we need you to have 100 basis points monthly performance with 10 basis points their deviation.
So [inaudible 00:36:10] off. Like [inaudible 00:36:13] off for us, but make it legit. These guys they add to these like crazy multi-strategy. They have 200 portfolio managers and sub portfolio managers. And everyone has like a 6% stop loss, which is almost you know what the daily volatility is on a stock, and it’s just crazy. And it’s impossible to accomplish what they want, they’re going to do it for, you know, 20, 30, 40 months in a row. And then they have these 10-15% drawdowns because it’s totally not natural how the market works.
And so you have a lot of these guys that just can’t step into something that’s in a downtrend. If they need to wait for it to bounce 30% they can come in. They can’t go into something that doesn’t have an immediate catalyst.
Mike Alkin: You know, it’s funny, because I run a uranium fund that I launched in June of last year, and I don’t talk much about it. But it’s a special purpose vehicle to take advantage of the blown up uranium sector. And people ask me a lot why don’t institutions own it, right? Don’t they see the value?
Yeah, they see the value, but they don’t see the stocks working yet. And just like you said they can’t afford most of the bigger ones can’t … Besides the fact the sector is so small, they need to market caps to rise because they don’t want to own too much of any one company. But momentum has a way of bringing, you know, the market seeks what’s working. And when they see it working, and they’ll start to get attracted to it. And it’s amazing how that works.
And that is the institutional mandate that they’re under, they cannot … There’s no time arbitrage in the institutional land anymore.
Harris K.: Right? I mean, well just look at all the stuff they hate. Let’s talk about coal, I think it’s more hated than uranium. There’s multiple institutional investors that have signed a document saying they will not invest in coal stuff. Which means that they’re going to tell their portfolio manager, we’re going to give you money, you can’t buy coal stocks.
Well, that gets me so excited, because I want to learn everything there is to know about coal. Take a look at these things and … Look, I get the whole global warming thing. And I get that in the US demand for coal is going to you know, there’s a secular change, and it’s going to be declining. But the rest of the world demand for thermal and cooking coal’s increasing.
Coal’s actually in a bold market globally. And they’re not building new coal mines, because you can’t get funding for a coal mine. Even if you go to a funny part of the world, you know, you can’t get the funding because you can’t access the global capital markets. Because with cheap capitals available to you because most institutional investors can’t buy the bonds of these coal companies. And the IFI’s can’t lend against the coal companies.
So they’re all cash built. And there’s not a lot of new coal mines being built. Coal demands going up, coal pricing is outstanding right now. Coal companies are making a fortune. You can buy these things at like two and three times cash flow. Like why would you want that? I don’t know what makes coal stocks go up. I just don’t know. But if you buy a bunch of things at two or three times cash flow, you’re probably going to make money.
Mike Alkin: Well look when you buy them that cheap and supply is shrinking and demand is growing, that’s a good recipe, right? It’s just a matter of when
Harris K.: I mean, you look at a stock like Peabody, okay, just because they’re really big on the US. And I’m not saying that’s the one to own. You have a situation where the company in the last 18 months is bought back, I think they bought back like 25% of the company’s shares outstanding. They’ve given you special dividends equal to like 15% of the current share price in the last 18 months between special and regular dividends.
I mean, it’s just kind of crazy. They have so much cash that they bought another coal mine because they [inaudible 00:39:37] someone else’s coal mine at three times cash flow, they have so much cash, they literally don’t know what to do with it all. Yet the stock goes down every day anyway because they can only be legally 25% of volume. They’ve already done one tender two tenders I forget. [inaudible 00:39:50] another tender for shares again, and just keep shrinking the float.
Like these things are so ridiculously cheap.
Mike Alkin: That’s the thing, yeah.
Harris K.: [inaudible 00:39:56] goes down every day anyway.
Mike Alkin: But at some point when the fundament are there, fundamentals matter, ultimately, they matter. They play out. And when you buy something like that, right, it’s going to work. You mentioned you go anywhere, you know, you go to funny places, whatever. But see you do have a pretty wide geographical dispersion that you talk about, that you invest in.
And one of the things you recently mentioned was it was time to buy Greece, with a question mark. Talk about what happened with your story there and you know, talk about a blown up country from an economic standpoint, but it’s kind of piqued your curiosity. So talk about what you see there.
Harris K.: So I mean, Greece is a mess. They’ve had a 10 year economic crisis, they’ve lost a quarter of their GDP, which is the only I guess developed country ever to lose a quarter of their GDP outside of wartime. It’s because the Troika went in there and basically killed the economy. They said, you guys have to run a budget surplus when they had a debt problem.
And if you can’t outrun your debt by growing your GDP, then you’re always in a debt problem. And add to the mess of the problem that you have all the banks that are totally insolvent. They’re not lending. They’re just a mess. You have political party that was in place, SYRIZA, who effectively sat there and kind of hamlet it back and forth as to maybe we’ll [inaudible 00:41:17] to correct it, maybe we won’t. Maybe we’ll [inaudible 00:41:19] be able to correct it, maybe we won’t.
Which obviously made everyone who was an investor terrified, and so you had this kind of messed up place. And I went and visited there about 18 months ago, wrote about it on my blog. And, you know, it seemed like it hit bottom because they had done everything possible they could to screw it up, and the stock market couldn’t go down anymore. But I didn’t know what was going to make it go better. I mean, the economy is growing like 1% a year and there’s bad macro, bad demographics.
All the problems that make it difficult to inflate your economy. But while I was there, I had a very senior guy from political party called New Democracy, who invited me to his office, I have no idea why to this day. But he basically for two hours talked me through what their political platform was, what they were going to do. New Democracy, they’re the guys who cut taxes, get rid of regulations, install out all these mega projects.
And there’s a lot of very large projects, airports, power plant transmission lines, port facilities, all these things you need for your economy from an infrastructure standpoint, where the projects weren’t moving forward because they couldn’t get the permits needed. They couldn’t get the permits because various people in the Greek government were obstructing the permit process asking for bribes.
It’s kind of a messed up situation. And, you know, the current government that’s still in power now seem to be, supporting these people that were obstructionists. And so, yeah, this stupid socialist government messing it all up. And these guys from New Democracy sounded like pretty logical guys. At the time they were about even in the polls with the socialist, but this fellow I met said, “We’re going to win this election, we know we’re going to win. And when we when we want you to think about Greece, because wanted to come back here and invest.”
And I don’t know if they told him I was a PE investor or, you know, I don’t know what he really thought. I was with another friend of mine from RBC. And, you know, he just said you should come invest and, you know … Now they just called snap elections, they called it last week. My friend from RBC called me, “Kuppy! Kuppy! Kuppy! these guys are going to win. They’re way ahead.” [inaudible 00:43:26] Greece in like a year and a half.
I mean once a week I check in and it’s just kind of sad news. And he’s like, we going to buy something. And we spent the whole weekend going through this list. By the way, his name is [Sasha Amber 00:43:40] might as well give him credit for this trade, not me. But we went through the list of like, all the large companies we’d met, because we spent two weeks there meeting every company.
And we just kept going like, this company sucks. I hate these guys. These guys seem like criminals, a bunch of related party transactions. I mean, it’s a bunch of Greek stocks. It’s what you’d expect, kind of. And so we just kind of both decided we’re going to buy [inaudible 00:43:58] just because you kind have a basket of these bad companies, as opposed to choosing one or two bad companies. And, you know, New Democracy, I think they’re going to win, they’re going to win by a lot.
The elections’ coming up in a month, we’ll know exactly how much they went by. But if you look at how this has worked in other places, and you know, I talked about Argentina. But you can look at this in lots of countries, when a country has totally messed everything up, you need some sort of change to get investors excited. And it’s usually a political solution. And so if you look at how this worked in Argentina, Argentina it’s a mess of a country
And when Macri looked like he was going to win, if you had bought it when he won the primary where it looked like he had a, you know, even shot to win, and you held it. In two years, you doubled your money with the Argentine ETF. And this is despite Argentina having inflation crisis, they’ve devalued their currency massively. A lot of his political program isn’t really working. He’s got a lot of political roadblocks himself, he might not be in power at the next election. A lot of the things he tried to implement kind of went off half-assed and made the problems worse.
But he talked the right language, he went on the global road show, and he went to Hong Kong, New York, London and talked to all the portfolio managers and got people excited about the country. I mean,[inaudible 00:45:19] did a 100 year bond. I mean, he’s a good salesman.
Mike Alkin: Yeah, [inaudible 00:45:22] going to flow that way.
Harris K.: Yeah. And you have a small little economy, and you have a lot of global macro guys that need a hot stock pick for the year. And, you know, money flow to Argentina for two years, and you doubled your money in two years, even though it didn’t really work. And it’s, as I said in my blog, it’s very easy to talk a good game, it’s very hard to run a country.
I mean, I don’t know if these guys are going to succeed or not, I wish them the best of luck. But for the next period of time, I think it’s almost certain that Greece will trade up. And I mean, it has traded up the Greek stock market’s up 10% since I wrote about it a week ago. 10% a week is kind of crazy, but I think it’s just going to keep going.
Mike Alkin: You know, it’s funny, right? There are stories [inaudible 00:46:01] and there are story stocks, you think about like a Tesla, which is a story stock, right? Uber story stock and … But then you have these, like you said, the macro guys, and for those who listen to the podcast that don’t understand the institutional mindset is themes take place, and people need a good theme. And when you start to see it, and then you’ll start to lay out a theme.
Money really starts to flow into these sectors and what you said earlier, things can go a lot longer than you think they can, in either direction. And when you’re in the early stages, and evaluations are cheap and … Those are interesting things.
Harris K.: Right. And, I mean, once it starts going, the money flow is just kind of track what’s happening. Yeah, I mean, just to kind of close on Greece. I mean, the stock market’s down over 90% over the last decade. And now I have two rules. One is when somebody is down 90%, usually can go up. Doesn’t mean you know, it stops at exactly 90, it can be down 99.
Two, the most money is made not when good to great, it’s made when it goes from really shitty to sort of shit. As you know, what’s [inaudible 00:47:07] down 90% the move from down 90 down to down 70 means it’s still quite shitty. But it’s a tripling. And that’s a lot easier than guessing, you know, when multiples will expand from 40 times to, you know, 60 times and make 50%. Like where’s the multiple going to?
And I mean, a lot of these Greek stocks, they are, you know, cheap and their margins have been squeezed for a decade and they’ve had no access to capital and blah, blah, blah, good things can really happen to our favorite sectors.
Mike Alkin: Without a doubt. So back in April, I was reading, and it was interesting because I saw you were writing from a beach in Cyprus, and you were going to be speaking at the VaulEx Caspian conference and it was in Baku, Azerbaijan. I have traveled and been in that part of the world but Azerbaijan has come on my radar screen lately.
We’ll talk about Cyprus in a minute, but I listened to and I have for 19 years now, every day, I have not missed and if I miss it, I catch the podcast and a syndicated radio show host called John Bachelor. And over the last 19 years, I feel like I’ve got a master’s degree in geopolitics and political science. He’s a treasure. And he recently in the last year or so has started visiting Azerbaijan. And he started talking about it.
And as I think about it, you know, he talks about it lies at the heart of the International Transport Carter between Europe and Asia. It’s got a growing and highly educated and skilled workforce and it’s got huge hydrocarbon reserves. Just curious. When you were there, any observations you might have from being there?
Harris K.: Well, we spent about a week and a half there, my wife and I and one friend of ours and we rented a car and just started driving. The conference was great, I learned a lot, met a lot of smart people Baku itself, they took an old Soviet city and they put a new facades on all the buildings and [crosstalk 00:49:09]
Mike Alkin: [inaudible 00:49:09] better than the old facade.
Harris K.: I mean, I’ve been to a lot of the post-Soviet cities [inaudible 00:49:15] they paid the façade. Here they-
Mike Alkin: It’s totally crazy.
Harris K.: They made them quite nice. It felt like a nice city. It’s a nice place Baku and then you go about five miles from downtown and all you see is like oil spills all over the place. Like 1940s derricks just spewing oil in the sky. And I mean, it’s like that movie, “There’ll be Blood” and you see guys producing oil and like the early 1900s. Like that’s how they’re still producing oil in Baku, there’s just so much oil.
But at the same time, it’s this giant ecological disaster and it stretches for hundreds of miles in any direction is just oil all over the place. Like pools of oil, there’s rivers of oil. There’s no rhyme or reason there’s like rusted electrical wires. There’s pipes with oil leaking out of them.
This guy’s with like, you know, little cups like basically stealing the oil from the pipeline, putting in their own drums. It’s total chaos. I mean, you’re driving and the roads are going like under oil pipelines and above oil pipelines and around oil pipelines, it’s on the road, you know, it’s hard to have tracks with the road. It’s just messed up thing.
And it’s just kind of odd to see how other people do stuff. And to think that you could add kind of modern technology there and probably make it a bunch more efficient. And just to see how rich they are in hydrocarbons because of the fact that they’re using ancient technology it’s still working. We toured the country, like the rest of countries reasonably poor, its people are friendly, not a single person spoke English.
We kind of pointed at stuff. Actually Azerbaijan’s is an odd place because following the Soviet tradition of kind of divide and conquer, they took a bunch of people that ought to hate each other and put them in one country and basically played them all off each other. So you kind of have this problem … It is not a problem because something of a totalitarian country, but you kind of … I mean, you have ethnic Persians to South. In the north you have people who are Dagestani, you have people who are Georgian. You have people who are Chechnya
I mean, they all seem to get along more or less, but it’s kind of odd country because, I mean, they speak about a dozen languages and about 100 cultures all thrown together.
Mike Alkin: Wow. Interesting place. So tell us about Cyprus and your view. I know you have a view on the Cyprus banks, how are you thinking about that?
Harris K.: So Cyprus is kind of like Greece light in that they also destroyed their economy. But kind of in different ways. They had a property bubble, much like Greece did. But they also … The Greek banks … I’m sorry. The Cypriot banks and their infinite stupidity while they had property bubble, they decided to basically outrun the property bubble.
Because you know when you have a bank, you kind of have a Ponzi scheme in that as long as you can keep growing the balance sheet, you kind of hide the NPL numbers because the balance sheet keeps getting bigger. So as a percentage of total asset, your NPL starts shrinking-
Mike Alkin: And just for listeners who don’t know he’s talking about non-performing loans, so NPL.
Harris K.: And if you do that for long enough, and you kind of bleed your NPL’s into your, you know, your official NPL statistics slow enough, you can kind of muddle your way through. And that’s what they tried to do. And when they saw Greek debt, when they saw Greek sovereign spreads blow out, they said to themselves, aha, we can leverage up and buy Greek debt. And it’ll all work out, okay, you know, via these nice fat net interest margins.
And then it just didn’t work, like they expected it to because they haircut of the Greek data, Cypriot banks all failed. And the ECB came in there and said, here’s a bad situation, we’re going to make it worse. We’re going to bail on all the creditors and all the capital fled the country. And when you don’t have a functioning banking system, I mean, we take it for granted in America that you know, you can go to the your ATM and take money out, that you can use your credit card, that you can send someone a check, and it’ll clear. You have access to your capital.
The whole system froze. And even when it started to thaw everyone was terrified to put money in. So the whole economy froze. And it’s been thawing finally. And I think it’s recovering. As I was there, the crisis was five years ago. Now, it seems they’re recovering. The best way to know if something is recovering is you look at what the cranes are doing. And if the cranes are moving, then things are probably getting better.
And you know, you talk to people and you say, is it getting better. And it does seem to be getting better. And you could buy Bank of Cyprus today at about a quarter of nav and about one and a half, two times pre provision income. And yeah, the balance sheet’s still a mess. And, I think they are a little bit under reserved, still, blah, blah, blah.
It’ll probably be a dysfunctional model. But you get to buy a bank at what is optically really cheap levels, and the economy is recovering. That’s the good news. Normally, you’d go and do that every day of the week. You know, banks are this thing where the government basically, if they’re supportive of you can out earn your problems and repair your balance sheet through net income over time, even though you’re functionally solvent, like Bank of Cyprus is.
And the bank seem to be … So the government seems to be supportive of this process. The problem is that the rest of Europe is in a zero interest rate world or negative interest rate world. So you have all these banks that want to lend in Euros in Germany and wherever else, and they’re looking at Cyprus, where you can get positive yields still on making mortgages or small business loans. And they’re coming in and encroaching with their much cheaper cost of funding, where … The cost of capital is negative.
I mean, just think about that. So I mean, they’re encroaching on the Cypriot banks, where Cyprus has to pay a higher interest rate to depositors. And they can’t get an appropriately high lending rate, except on small mortgages, super small SMEs stuff. And again you squeeze on both sides of the net interest margin, which will slow their ability to repair their balance sheet.
So these things were … I spent a week traveling the country, getting more and more excited about Bank of Cyprus, and you meet with management, you get a sense of the realities of the ground, you kind of go, oh, this is kind of what’s happening here. And that’s why I like to meet management. I’m not always the biggest fan of sitting down, because you get lied to sometimes but if you’re willing to kind of ignore about two thirds of what they say sometimes you get to learn something useful.
Mike Alkin: Absolutely. So I think you and I share a similar view in the sense that you’re kind of pragmatic, as you view the markets and I know, you like to understand and rely upon financial history. I mean, for me, you know, especially investing a lot of deeply cyclical sectors. You know, if history doesn’t repeat, it rhymes-
Harris K.: Absolutely.
Mike Alkin: A great deal. And you know, it’s human behavior. And even with the algos and everything else that’s in there, you still see these patterns, and so much of investing is pattern recognition. And you had talked back in March, and I thought it was fascinating. You talked about, you know, the Fed should be bumping rates, 50 basis points, right.
And here we are, just a couple of months later. And we’re sitting here and we’re hearing, you know, a couple of the investment banks, and they’re seeing a 50 or 75 basis point cut-
Harris K.: It’s insane.
Mike Alkin: It’s insane. And so here’s the Fed in the role of supporting the bubble, a financial bubble, rather than supporting the actual economy and letting the natural things take place. What’s your view of right now, what’s going on from macro standpoint?
Harris K.: Well, I think global economy is slowing. I mean, I don’t really trust government statistics, but you look at stuff that’s not government controlled, like electricity usage, or rail car loadings, the stuff that isn’t hedonically adjusted, and I think global economy is slowing.
The trade war’s part of it, but we’re 10 years into an economic cycle, these things just end on their own sometimes, and the trade wars, obviously accelerating this process, because you’ve trillions of dollars of capital investment that are going to have to be impaired. And that’s going to hit people’s balance sheets. And, you know, you have people who are saying, “Hey, wait a second, let’s not reinvest here. Let’s just do nothing this year, and figure out what’s going to happen.”
And so yeah, you have this natural slowing process, as all supply chains get, rejiggered globally. And it’s kind of feeding into what’s happening, where you [inaudible 00:57:51] 10 years into an economic recovery and all the central banks put as much money as they could. And I just don’t think they’re going to be there to prop it up. They’ll try. But I don’t know if they’re going to be able to prop it up and stop what’s going to be an economic cycle. Because these things are cycles, and they’ve gone on for thousands of years, and they’ll keep going on for thousands of years. And the central banks will always make it worse. That’s their job. And-
Mike Alkin: They are good at it, they’re pretty good at.
Harris K.: They have a lot of experience at it. So I think things are slowing, I made a call, like two weeks ago, take something off the table. And I took quite a bit off the table, I’m about a third cash, I got a bunch of Tesla puts. And I’m sitting there waiting to see what happens.
The great thing about not having performance pressure and you know, I’ve designed my funds, I don’t have this performance pressure I have to perform each month, is that I can trail. You know, some months I can be under invested, I can sit and wait. There’s always going to be an opportunity somewhere and the best money is made by sitting and waiting. Like if you told me five years ago that I would own energy stocks, I would laugh at you because I hate energy.
Here I am energy stocks. They’re just so beat down and [crosstalk 00:59:04]
Mike Alkin: Absolutely right. Offshore drilling, I mean so many stocks trading in half a tangible book. And at the last peak, they’re trading four, five, six times tangible book. And you know, a few of these during the downturn, were generating free cash flow and not increasing the share counts. And you’re like, wow, that’s pretty interesting stuff, right?
Like some things you just can’t help but buy. But you had mentioned something, you know, positioning, so how do you think about your exposures? So, you’re 30% in cash and the way I view the world is and not with the uranium fund, which is has a different mandate, right?
My view there is turn is imminent and we’re going to have exposure to it. But for a typical portfolio, I view the world from a risk on risk off standpoint.
Harris K.: Absolutely.
Mike Alkin: And that kind of maneuvers my net exposures. Now because I do … Over the years, I am more comfortable on the short side and expressing it through both the shorting inputs to balance out. And shorting for alpha not just for exposure, and we’ll both laugh because you know that shorting for alpha in theory sounds great.
Harris K.: [inaudible 01:00:12]
Mike Alkin: Exactly that sounds good. But how do you think about, you’re 30% cash. Give listeners a feel for what drives that feel for you. Or is it on an investment by investment basis, if you saw a few ideas that were there, would you then increase exposure or are you going to step back and wait for things just to settle out?
Harris K.: I mean, if I saw great opportunities, I’d be more engaged. I always find that the best money is made during that kind of one to three times a year where some sector gets oversold. And you just kind of … Think of it like a big pool of money, because the money sloshes back and forth in the pool, and sometimes it sloshes way too far in one direction.
And you have some part of the market that you just walk into and the water is ankle deep and it’s just easy. And it may not be super smart about that sector, you just have to know that it’s really, really cheap. The most money is made by sitting on cash and just waiting. And, you know, as we talked about before, when these fund flows get going, they tend to overshoot.
Historically and now in particular, they really overshoot because of the macro makeup of the market, and I just wait for those sectors to overshoot. And that’s where I get exposure, I often start getting exposure by writing puts. I tell myself, you know, this stock is at 20, I can write 17 and a half put and get paid $1, you know, I’m making a decent return on my money for one month, two months of risk, whatever it is.
I mean, you’re making mid [inaudible 01:01:53] digit return, that’s good. And I end up owning it at 16 and a half versus 20 today, I’m okay with that. And I’m not just writing inputs, because I’m trying to take some like, diversified risk portfolio, you know, premium writing strategy, I’m writing puts on stuff that if I got it, I’m okay with it. And if I don’t get it, I make my cut percent each month, which adds up very fast, and life goes on.
That’s usually how I start, where I’ll start writing puts in the sector because you know, it’s getting cheap. And then usually I’ll get a sign, not usually the first or second month and maybe the third month. Which means instead of the stock being at 20 today, if I make $1, two months in a row, you know, my average is now and I’m writing 17 halves, my average is going to be like 15 half.
Which is outstanding because they have already take $2 out of it, and they get signed to the 17. So I mean, I’ve just taken my cost basis down by quarter. And that’s usually how I start the process. And then from there, you see how far do you think the sector can go. You can’t just buy something going down. You can’t just buy it cheap. You have to make sure you have a reason why it’s going to recover and cheap isn’t good enough.
You need to have some sort of macro catalyst here mind for why it’s going to start getting better, because there are a lot of cheap stocks that just keep getting cheaper.
Mike Alkin: Oh, my God. And so when, when you think about … Country wise, when you’re investing locally in countries and we’re talking about Greece or Cyprus. I know you do ETF’s. But do you ever invest locally, as well in the local [inaudible 01:03:25]
Harris K.: I mean, I’ve got a bunch of brokerage accounts that I left some money in these places, and we bought some shares. And yeah, I’ve done that before. It’s part of being a macro tourist, I mean, to go some funny place and open a brokerage account with some broker that has no teeth and give him 25 grand of your money and have him allocated as best as he thinks. And then keep track of the statements and watch as they have a bunch of foreigner taxes along the way.
And you just kind of watch your money bleed away. I’ve done it before. But I tend to invest much more in the US these days. I mean, I don’t think you appreciate rule of law until you’ve had something really bad happened to you. And I’ve had bad things happen a lot. You don’t appreciate the impacts of currency volatility, and all these other things that kind of clip your returns.
And you can usually find really good opportunities in America, particularly as we talked about the makeup of the market structure day means there’s a lot of sectors that if it’s not growing, or even if it’s just shrinking slowly, there are so many opportunities because no one wants something where the top line shrinks 3% a year, even if you get it for two times earnings. That’s where I spend my time.
Mike Alkin: Any sectors or countries that you just will say, you know, I’m not going to do it. For me, it’s biotech. I mean, biotech and financials, I tend to typically with financials, the big money centers are just too opaque for me. And biotech, I worked with some really smart MD’s who transferred over to become investors. And I’ve seen them struggle with it to try to figure it out.
And except sometimes where they become so cheap, you know, they’re just call options. But are there any sectors that you just stay away from, because for whatever reason, you just don’t have the right feel for it?
Harris K.: I mean, biotech and financials to start with, junior mining. I really don’t touch anything that doesn’t have revenue, and preferably cash flow for the next year. Because I don’t really know what I’m valuing. I mean, if you take something with a lot of asset value, yay, good value, the asset value, but, you know, stuff can trade for less than asset value for many years in a row. So what’s the point?
If you don’t have a positive cash flow that grows that asset’s value, then it just going to be cheap forever. I’m really looking at stuff with cash flow, and I’m looking at stuff it’s easy to understand too. I always say if the CEO got hit by a truck tomorrow, I could step into his shoes and run it. Which means I have to be able to understand what they do. So it’s nothing technologies, nothing cutting edge tech. You know, even something like energy, I don’t do energy stocks now. But I understand it in the most basic of terms, they put holes in the ground oil comes out.
But if you asked me to do something even slightly more complicated in energy, I’d be lost. And these aren’t exploration drill plays, these are guys that are producing from massive resources they’ve had for years. They’re just expanding it where there’s very little variability in each hole they do.
Mike Alkin: Hey, did you read Chris Mackintosh’s piece on hydrogen?
Harris K.: Yeah, I thought it was outstanding.
Mike Alkin: It was great. It was one of the best piece I’ve read on anything in a long time. It’s pretty fascinating because I kind of know the nuclear power sector pretty well. It’s pretty funny. So what I’m talking to folks is Chris McIntosh, a capitalist exploits wrote a really good piece about the role of hydrogen, in transportation, in hydrogen in vehicles.
And talking about how he thinks things that you could, over a period of time see that start to displace the EV’s. And here we are. Because of nuclear power I read a lot about the history of it. And there was senator Pete Domenic out in New Mexico, who was a senator for many, many years.
And being New Mexico is a big uranium mineral belt, he had written a book back in ’03 about nuclear policy in the US and the growth and the importance of nuclear power. And one of the things he talked about back in ’03, ’04, it was a foregone conclusion was that there was no other choice but to use hydrogen as a transportation fuel.
And here you are, you know, 15, 16, 17 years later, and it’s off people’s radar screen. But Chris does a really good piece about it. What was your takeaway on it?
Harris K.: Well, I sent it to my father who is much smarter at this sort of stuff than I am and he’d never heard of this hydrogen. And he read it real fast, and called me back super excited and said this is the future. He was so sure. And, you know, I’ve kind of googled around, I’ve read some stuff. By the way, if readers want access, I begged Chris to let me repost it. And there’s a link on my site. So you can click through and get access to his [crosstalk 01:08:21]
Mike Alkin: adventuresincapitalism.com, they could go to your site, and where would they find that? Just like under the headlines [inaudible 01:08:30]
Harris K.: Headlines of something about hydrogen, it’s there. So if you want to read[crosstalk 01:08:33]
Mike Alkin: It’s a great read.
Harris K.: I strongly recommend everyone read his article. And I read a bunch about it and learn something and I’m convinced myself. And one of the great things about having a blog like I do is that readers of mine are very knowledgeable, as well. And quite a few of them wrote me back.
Actually, one of them is in this field doing some of the research. And I mean, I just learned a lot. I also learned that there’s problems with the technology too that haven’t yet been solved. Whether it’s transport. Using it as transport is great if you have a train or using a boat, but on the highway, hydrogen catches fire. You don’t want to get rear ended with a hydrogen tank under pressure. Like that’s one of the problems they haven’t yet solved for.
I mean there’s other problems to be solved for as well. It’s just great to get a balanced perspective from readers. You know, it’s not as efficient in terms of holding energy, transporting energy, there’s more loss of energy from a physical, you know, think of it from a physics standpoint of converting electricity into hydrogen and back, versus other technologies like lithium batteries.
So, I mean, there’s drawbacks to all technologies, nothing that science and money can’t solve. But very educational. I think that’s the future things ago, and I just don’t know how to play it.
Mike Alkin: No, it’s … It opened up my mind to think about it. And like you said, it is complicated. That’s one of the things I love about having a podcast is and you have your blog, you get so much great feedback from people all over the world who are so much smarter than I am, that you get really interesting feedback.
And for me, whether it’s tech, and we talked about biotech, pretty much in New York find a lot of things. For me, mining makes sense but not exploration because it’s one out of 5000 holes lead to anything, but for me put a hole in the ground, something comes up, it’s like simple, I could get my head around that. If they have cash flows, that’s even better.
But in the world of uranium, it’s a different story. So alright, so you stay away from pretty much financials, you stay away from pretty much biotech, any sectors that you kind of think like, “You know what, over the years, I’m pretty good at this,” that I got a good feel for it.
Harris K.: I like shipping a lot. It’s just a sector that’s-
Mike Alkin: Oh, interesting.
Harris K.: Very logical. I mean, you have these vessels, you know what they’re worth, the stock market tends to misprice them chronically. At the top of the cycle, they tend to be value based on cash flow, because people convince themselves that these things because they’re paying a dividend or suddenly stable, which they’re not.
And at the bottom of the cycle, they [inaudible 01:11:03] multiple [inaudible 01:11:04] because they’re probably losing money. Plus they have a bunch of financial leverage which makes them very, very volatile. Whether it’s on a multi-year cyclical basis, or even on a monthly basis, just because they tend to miss estimate.
I mean, shipping charter rates are amazingly volatile based on geopolitical changes, and shipping changes. You just have one mine in Brazil have an accident. And, you know, [inaudible 01:11:31] rates collapse, for instance. And I think you watch these things, you can read shipping publications.
And because there are a few shipping specialists in the stock market, when you see something happen, the stocks don’t react very fast, which gives you a long time window to make a decision and do something before generalists who own mostly shipping stocks, do something. Whether it’s buy or sell.
Which means that you don’t even have to be very smart at this sector, you just have to kind of pay attention. And you usually get one maybe … about one chance a year to do something super smart in shipping where rates move in a direction. And it’s not pricing the stocks. And it often takes a quarter or two to get priced in.
Shipping is funny in that, right now we’re in June. And if you sign a charter today, it’s not going to show up in q2, it’s going to show up in q3. And they’re going to announce q2 results sometime end of July or early August. And whatever happens in June is going to move the share price because computers look at what just happened with most recent results. What happens in q3, which is when the charters for June are signed, that’s going to get announced in October.
So you can basically have this window of time now where things are good or bad. And it’s not going to be reflected in the stock because the computers who dominate what happens in stock trading, aren’t looking at it. And they’re not plugged into the charter rates yet. And they’re not really smart about the charter rates. And you just have a lot of opportunity, particularly when you have large changes like IMO 2020 that’s happening.
Where IMO 2020 mandates that all fuel needs to have low sulfur content. And it’s going to create massive disruption to the shipping industry, as traditional bunker fuels become obsolete. Unless you have scrubbers. And so you have this thing where demand for low sulfur product is going to increase by two to four million barrels a day depending on who you ask.
And the world isn’t ready for this change. And I think you’ll see shipping rates increased quite dramatically as vessels slow steam, as inefficient, older boats get scrapped. As general disruption to the industry happens with this inability to secure fuel or other things happen, I can have a decent amount of chaos. My large positions [inaudible 01:13:56] Scorpio tankers, which is the largest product tanker owner in the world.
And they’re going to be the largest beneficiary of this because demand for product tankers is going to increase quite dramatically going forward, just to move all this fuel around as low sulfur fuel that’s suddenly needed. Plus they’re going to have scrubbers and all their boats going forward, which will give them pretty dramatic cost advantage.
Anyway, that’s my biggest position. It’s already up 50%. So when I put it on, I wrote about on my blog, and I put it on in January. And it’s one of those things where you can watch the news, notice thing is going to happen with IMO 2020 and get prepared for it, learn about it.
And we actually saw a product tanker rate starts spiking in December in preparation for IMO 2020. They’ve since had two great spikes, and we’re at the seasonal lows right now. I think it will start increasing again in the near future. But by watching what’s happening with product tankers and knowing that this IMO 2020 things on the horizon, and I was able to get myself better than a 50% return in four months and-
Mike Alkin: It’s great.
Harris K.: It’s a sector that I just like for that reason.
Mike Alkin: So when I think about Kuppy and the travels of Kuppy and you go to your website, then you’re a fund manager, you’re a hedge fund manager. And if I clicked on one of those links on that website, I would find out not only are you a world traveler, not only are you a deep value investor, not only are you a hedge fund manager, but you’re the CEO of a Mongolian company.
Harris K.: Yes I am.
Mike Alkin: So let’s talk about that for a second. Tell listeners about the Mongolian Growth Group.
Harris K.: Sure. So I went to Mongolia in the summer of 2010, at the time it was the fastest growing economy in the world. Myself and a couple of friends decided to launch a company to invest in Mongolia, called Mongolia Growth Group with the goal of buying property-
Mike Alkin: Is that over a few beers one night or are you just like you [inaudible 01:15:49]
Harris K.: Yeah, that’s one of the worst decisions could decide it. And we decided launch a company to invest in Mongolian real estate. And it was amazingly successful because Mongolia was a fast growing economy in the world 2011. And then they had an election, and the wheels fell off, literally.
They banned foreign investment, they arrested a bunch of foreigners, they sold a bunch of foreigner assets, they totally made a mess of their country, the economy collapsed, the currency collapsed, the IMF had to come in and bail them out. That didn’t really quite work. You know, it’s just been a total mess. It’s been an absolute terrible experience for investors who’ve lost a lot of money now.
And, you know, it kind of shows how difficult frontier markets can be in that everything’s going great, and then everything goes awful. And it’s kind of binary in a way. And recently the People’s Party won the election, they were the ones who were in charge when things were growing. They’ve done the right things in some ways to fix the economy and the economy is recovering. I mean, that’s the good news.
The bad news, I think is that a lot of foreign investors have a really sour taste for Mongolia. And it’s going to take a very long time for things to actually recover, you know, beyond just bouncing off the bottom, you need some sort of catalyst, you need the government to approve some these mega projects or do something else. You really need something that changes the dynamic, and I don’t see it on the horizon.
It’s frustrating, because we have a lot of property. And we did what we told investors we would do, which is go in there and build Mongolia’s only institutional property management group. And we built a great team, we’re one of the largest brokers with third party property now. We have absolutely great people running the company, both in Mongolia and overseas. I mean, we did everything we told investors, we would do. But it didn’t really matter because the country didn’t do what it was supposed to do.
It shows that things can go really well. And people look at the ones that go really well. Or the ones that hardly you fail. And you kind of often end up with sort of a middle. And it’s kind of frustrating.
Mike Alkin: How do you like … What was your experience from a management perspective? I mean, how did you enjoy that? I mean, not obviously after the day after the elections, but just in general, I mean, being a fund manager, and then being on the other side dealing with institutions, are there things you learn from being on the other side you when you’re dealing with investors and institutions that you apply towards when you’re investing?
Harris K.: So I guess my biggest frustration as a minority shareholder in any situation is when you sit there and say, these guys are idiots, they’re screwing it all up. And as CEO, you have a lot more power to fix the problems. If you looked at some of the stuff we did, when the economy started falling off quite dramatically, we went in there and dramatically cut costs, said we don’t need this, we don’t need this, we don’t need that.
We just got to outlive this thing and survive. It’s amazing when you put your mind to cutting costs, and you have the ability to cut the cost, how much cost you can really cut. And we took out more than half the cost structure. That was just totally not needed. Because the process went from let’s grow, let’s go acquire assets, you have a deal team, let’s go raise additional capital to grow.
And the thought process is let’s not grow, let’s just survive and muddle through as best we can. Because every dollar is our last dollar. And when you change your mindset, you can accomplish amazing things. You see a lot of management teams where they say, now it’s going to recover next year.
You know, who cares, not my money anyway. So we usually keep doing the same thing, and you have a situation here where I own 19% of this company, and my family owns shares, a lot of my good friends own shares. Like we already made the mistake of investing in Mongolia, we’re not going to compound the mistake by running through all our money.
And I mean, I think Warren Buffett said this is the best where he said that the best way to learn about investing in other people’s stocks is to have your own company once. And I’ve learned so much about how things work in a public company, and how little … How different things are than what you expect them to be. And you also kind of learn when a company puts out a press release and it says one thing that’s kind of confusing, it means the lawyers wrote it because there’s another press release coming next month.
You kind of learn more how this process works. And the CEO’s isn’t king, you still have a board of directors you have to report to. And they have an opinion about stuff. And even when they agree with you, they want to be informed. And sometimes informing four or five very busy people takes three weeks just to set up a call that everyone could be on. And it slows the process down.
It is what it is. But you just learn that things don’t always work, how you think they work. A lot of CEOs walk around like they’re king of the world. But that’s not the real way it works, because you still board directors you have to work with. And I’m lucky I have a great board of directors, they’re amazingly helpful. They’re one on one, they’re available anytime of the day, but getting on the phone at the same time is still a challenge, because two of them are in Mongolia, and two of them are in Canada.
It’s been a great learning experience for me in so many ways as to what’s possible, what’s not possible. And it’s very frustrating that so far it hasn’t worked out well, but I haven’t given up yet.
Mike Alkin: So, on the investing side, I mean for me, I have a book much thicker in my things to remember, mistakes I’ve made along the way, which you know, is a big thick book. And I think about that, for me I learned more from my mistakes than I did my wins. My wins were more damn, I guess we’re intuitive and instinctual and on the losses, but in the short side too I mean, I could write a book on just the art of investing on the short side.
What kind of postmortems do you do when you’re making an investment as a fund manager? Are there things that you just are front and center for you in your head that you’re like, shit, I’m not going near that because of x, y, z? Or do you … You know, some people say to me, you know, you got to be like a relief pitcher in baseball, they forgot that they blow the last save. They just going to go right back into it.
How do you think about, you know, when something doesn’t go right from an investment standpoint?
Harris K.: That’s a really good question, actually because I probably don’t spend enough time on the post mortem side. You know, I think a lot of the things I invest in, especially the ones that are down a lot, you go in there eyes wide open as to what you’re buying. You’re buying something that’s not going great.
And you have a macro view or structural view that it’s not going to get much worse. And it’s going to start getting better for these reasons. And you know, if I’m wrong, I have this protection in the balance sheet. So you know, let’s average into this thing on some sort of scale, that gives me plenty of room to buy more from early because I’m always early.
And to see how it works. And I think my biggest post-mortems aren’t guessing the valuation of stuff, because that’s reasonably easy to do if you will put the hours in. It’s guessing how long it takes to unlock the value and what the actual catalyst is and what you think the catalyst is, might be deferred for six months or a year, or what the motivation to the management team are.
A lot of management teams say the right thing, but in reality, they just try to hold on to their jobs. I think that’s really the mistakes I make where you expect something to happen immediately, and it takes two years. And that dramatically changes your IRR. Maybe not your return on investment, but on the individual investment for your IRR in terms of how long it takes, and that then feeds into your total return to your fund.
For me crystallizing what the catalyst is that unlocks the opportunity, I always find the hardest. If you look at catalyst, a lot of times the catalyst that unlocks it is something that’s totally unpredictable-
Mike Alkin: I [inaudible 01:24:27] never even thought up, right?
Harris K.: Well, last year, I think I had three companies that got acquired. And they reached 10% positions. I run a fund, it’s very concentrated. So my I usually run … I like to be in the seven to 12 [inaudible 01:24:40] which means your average position is about 10%. But I usually have a more concentrated buck. And then I have a couple of really small positions and some puts I wrote.
So you have a 10 or 15% position that’s acquired a 30% premium. I mean, that’s been a good month.
Mike Alkin: Yeah, it’s been [inaudible 01:24:56]
Harris K.: I think three of them last year … Every year I have two or three of them. And you know, you don’t always need to know what the catalyst is to unlock it. And sometimes what you think the catalyst is going to be something totally different.
Especially with all the PE funds out there that need something to buy, you know, if it’s truly cheap and stock market doesn’t give it credit, after a while the board just kind of gets exasperated because I mean, if you’re a board member of small cap company, you take a ton of legal risk, they pay you about 10 grand a year, and you get a bunch of stock options.
Stock options aren’t going up, the stocks going down. And you probably bought some shares along the way. You’re taking a ton of legal risk for 10 or 20 grand a year, like who wants to do that? So eventually the PE deal starts looking better and better. And you just end up with … A lot of these they get acquired, some mergers.
You don’t know what’s going to unlock it. And that’s always been my problem is that I always believe oh, it’s really cheap, it’s going to unlock and sometimes it just sits there and it’s maddeningly frustrating to own something that you know is cheap and the market disagrees.
I don’t think I get the valuation wrong very much. And usually I can guess the incentives. To an extent the management team that they won’t do anything insanely stupid, that makes it worse. And that’s my biggest issue if you look at all of these. It’s just they sit there muddling. And after a year or two, you say, “Why the hell do I own this? It’s never going to unlock?”
Mike Alkin: You know, it’s … So from a portfolio management standpoint, do you … You mentioned small positions. Do you start small and then build into the 10, 12 15% position? Or you scaling in? Or how do you typically position the book?
Harris K.: It really depends, if you have something that’s been just melted lower, and it’s not like falling knife or it’s 10% every day, but it’s kind of like one of these, you know, two or three percent every month, it just slowly melts lower.
You going to just choose where it’s going to bottom. Stocks don’t just bottom for the sake of bottoming, there’s usually a catalyst, whether it’s earnings where people see it, it gets less bad. If a management change or [inaudible 01:27:04]change and activists show up, you know something that serves a catalyst, and eventually new incremental buyers come and it starts building a base.
And you know, in those sort of situations, as you see it start building a base, you can average away in over time, there’s no great hurry to do something. And as I said, I like to average my way in through options, because I’m pretty much guaranteed a few percent a month, which you know, that’s a fast.
And then as it starts turning, and as you get more information on how it’s turning, I add more, and sometimes you’re going to pay up a little, sometimes you to get a little bit lower price, I’m not going to pay up dramatically. But as the situation turns for the better if it’s not reflecting the stock, then it’s cheaper.
Like people have this view that the stock was at 10, and it’s at 11 now, you’re paying up 10%. And that’s wrong. And in some cases, that is but sometimes it’s a much better investment in 11, or even at 12. By the time you’re at 13, you’ve given up too much edge.
If the story has changed dramatically for the better, maybe the macro’s changed somebody else’s changed, it might be a better investment. And, you know, you might pay up that 10% from 10 to 11 but you saved yourself two years of time locking your capital too while you’re wait for this thing to happen that you were expecting.
Mike Alkin: I’m going to botch the saying but I think it was Keynes who said when the facts change, so do my views. What do yours do?
Harris K.: Something like that.
Mike Alkin: Something like that.
Harris K.: It might be his only smart epiphany [inaudible 01:28:29]
Mike Alkin: Exactly. That’s fascinating. What about stop losses? Do they play a role in how you manage?
Harris K.: [inaudible 01:28:36] in them. If something-
Mike Alkin: I have no use for them, but I’m glad to hear you say that so.
Harris K.: If it gets cheaper, why would I sell? The only thing I do believe in is time losses where you put something on you say I’m going to give this management team two years to unlock this value this they keep telling me about.
If they can’t figure it out in two years, well to hell with them. And I believe in that sort of like a time to stop loss. What other people who do
Mike Alkin: So what, as we wind down here, what’s top of mind for you right now? I mean, when you wake up in the day, and you’re thinking about you know, the portfolio thing about new ideas, what gets you jacked up right now?
Harris K.: It seems like we’re the early innings of stock market correction, crash, whatever you want to call it. I mean, I got my shopping list and checking it twice. I mean, the great thing about having cash is you know, market was down, what, five, six, seven percent last month. And, you know, it gets me excited, yeah.
You know I didn’t have the greatest month, but I’m still up in the month, and it gives me a chance to sit there and just wait and find something great to buy. I have this great list of stocks. Unfortunately, I haven’t pulled the trigger yet. Because every day they get one or 2% cheaper. It’s great.
We [inaudible 01:29:57] edge in finance and we think of it like an asymptote. You have this asset that’s worth 100. The market’s valuing at say 50 and the next day it’s at 49. The next day, it’s at 48. You have this sliding scale, it’s never going to get quite to zero. And you got to choose when it’s as close as possible to crazy land in terms of valuation that in your head kick it can’t get any cheaper.
And then you go all in and you start buying and every day that you wait it gets cheaper but you don’t want to wait too long because these things don’t go to zero. That timing and perfection. But the great thing is that if you miss it, all it happens is you’re you have too much cash and something great happens next month.
So there’s no urgency to buy something. You can always be patient and what I’m looking at right, now what really excites me is just this whole Ponzi sector blow up. This is one of the nerdiest things I’ve ever seen. I mean, look, we’re right now having a bubble in fake currencies. We’re having a bubble in fake companies.
You have companies that literally a losing a few dollars every time they drive me somewhere. It’s amazing that I can take an Uber right now that’s less than parking. And you have a human who drives around for 15 minutes, and still less than me paying for [inaudible 01:31:16] parking.
It’s just amazing that this business exists and that there are people who are willing to subsidize my taxi ride for a few dollars a ride or whatever the number is. And it’s a great service. I love it. I hope it’s around for a long time but not going to be [crosstalk 01:31:32]
Mike Alkin: It was crazy. When they reported the other day, Uber reports and I forget. Bloomberg or somebody had the headline. Uber shines on sparkling quarter losses at 1 billion.
Harris K.: [inaudible 01:31:43] job guys. Great quarter.
Mike Alkin: Great quarter guys.
Harris K.: Shareholders liked it the stock is up since they reported it. They managed to lose enough money that people are excited. I have a good friend actually. He does small cap with me and he laughs every time I give him a stock he goes, “Kuppy, You’re right, but they don’t lose enough money. No one’s going to buy it.” I’m like it’s three times earnings, it’s half cash, the market cap is like … I got one and it’s growing really fast.
And he’s like, “Yeah, but they’re not losing enough money. No one’s going to want it.”
Mike Alkin: Just crazy, it really is. I read … Like you, I’m on Twitter. And I look at some of the rationale though, for some of these things. And it just feels like silly. I do feel like borrowing someone’s term of Silicon Valley of it gets to these points where it just becomes ridiculous. And you start to see the machismo and you start to see the bullshit that comes out of there and you feel like it’s just … It’s going to end sooner or later. But-
Harris K.: [inaudible 01:32:46] all super late cycle stuff. The problem is the Fed keeps waking up in the morning they go, “Huh, multi-billion dollar, 10, 20, 50 billion valuation for an unprofitable company, that seems about right. Because you know our data goes back about six years, that seems about accurate and we got to make sure these things keep self-funding and now the problem is that these companies employs so many people that if they get cut off from funding, like large parts of the economy are so fake that they can’t be sustainable.
I don’t know what the [crosstalk 01:33:17]
Mike Alkin: That’s why Tesla’s still exist right now with all this. Can you imagine another if this company employed 1000 people and not 42,000 people?
Harris K.: Let’s go back to Tesla. Because this’ the most nerdy thing. Here’s a company that’s killed dozens of people, okay. The product. I mean, ignore the fanboys and everything else because it’s … The Model S is a nice car, has a nice acceleration, I get the excitement about the vehicle.
But the wheels fall off, the wheels literally fall off. The car hits a pothole, and it burst into flames. Auto pilot has killed dozens of people already. It’s amazing that you have the federal government not stepping in and stopping this thing.
I mean, they’re literally at the point where they’re killing two or three people a month now. And it’s not … I mean cars kill people. That’s life. But this is product failure killing people where a wheel falls off and someone dies.
we’ve had right now four fatalities in five months in Florida, where I live, just one state. And every one of them was vehicle failure, no human error. You had two auto pilots, and you had two whompy wheels.
Mike Alkin: The whompy wheel … You know, as a parent though, like this autopilot thing. I mean, as a parent having children in a car, it scares the living daylights out of me. And to see that this is not regulated. And where is the NHTSP on this? Like, what are they doing? Like how-
Harris K.: What can they do? Let’s walk it back, Okay? If you force them to recall, there’s 600,000 cars on the road. It’s growing by, I don’t know, 60,000 to 70,000, a quarter. We have 600,000 of these things on the road, if you forced them to recall these cars, the company goes bankrupt tomorrow, because the company’s bankrupt.
If you see you have these things where … I mean if you think about it, whompy wheel doesn’t happen to older vehicles, because you have corrosion issues, you have stress issues. So if you think of what the average age and how many cars were on the road three years ago, you’re only looking at maybe, I don’t know, 50,000 cars, 75,000 cars.
There’s been 500 whompy wheels. I mean, you’ve almost 1% whompy wheel, you know, percent, you know, and we think of cars. I’m not an auto engineer and I’m not an engineer at all. But these things are massively over-engineered because cars go off-roads, cars hit potholes, cars have just stuff happened when you drive a car for 200,000 miles.
So your whole chassis and wheel everything is massively over-engineered. So the idea that a wheel would ever fall off is ludicrous. I mean, if you think of other auto manufacturers, if they had two wheels fall off in a year with multiple millions of cars on the road, that’d be called crazy.
Here you have a few of these a week and you having about one a month kill someone in America from the whompy wheel, it’s nuts. But you can’t recall the car because the company will go bankrupt instantly and when a car company goes bankrupt, you have this real problem where … I mean, especially in Tesla’s case, who services the car, who does spare parts, who does over the air updates.
I mean, that’s the most stupid thing I’ve ever heard of. Like, I have an iPhone, they update the thing over the air all the time, and half my apps don’t work. Like you’re going to have a car that’s driving that’s just going to have an update. So you have them recall, Tesla goes bankrupt.
If you mandate that they have to turn off autopilot, well, now it’s not really a special car anymore, goes bankrupt. Anything you do push it into bankrupt because it’s already bankrupt. It’s kind of like, you know, the Greeks with their banks. They don’t want to have a bankruptcy, they don’t want to crush equity.
These things just sort of model and the difference with Tesla versus Greek bank is the Greek bank is profitable on a PPI basis. It just hasn’t recognized all the billions of losses that they had.
Tesla needs a billion dollars a month keep lights … A billion dollars a quarter to keep going. And that loss ratio is going to accelerate as demand for the cars keeps winning because you have a lot of fixed costs in an auto manufacturer.
Plus, Tesla has a lot of outstanding off balance sheet liabilities, whether it’s, you know, Panasonic purchase commitments, or, you know, future lawsuits for killing people or about 10 billion of deferred warranty builds up on their balance sheet. And you have all these off balance sheets like-
Mike Alkin: Fun, fun.
Harris K.: But I mean, this thing you can look at and this is a $40 billion company and it just boggles the mind. And I know it’s going to zero and it’s been leaking kind of a few dollars a week. It’s already on the way to zero.
It just amazes me that this stock isn’t trading at two or three dollars right now. And it’s amazing the government hasn’t stepped in because you know these things keep killing people and I don’t want to be in the road with Teslas and my wife doesn’t want to be on the road with Teslas and no one in their right mind should have a car that’s ran by a computer.
I mean it’s accurate about 98% of the time. It’s kind of like you know if you knew that 2% of time you got into the airplane it was going to crash, they’d stop autopilot. I mean, you had Boeing that had two crashes and all hell broke loose and here with Tesla, these things crash all the time, no one’s done anything.
Mike Alkin: Have you ever seen … I haven’t. Have you ever seen anyone like Musk where he could say whatever he wants? Yeah, big deal the fine he paid, but I’ve never seen anything like it. But I’ve never seen anything where think about a company that has constantly over-promised dramatically under-delivered and it doesn’t matter.
I mean it’s a phenomenon I’ve not seen. I don’t know if it’s maybe because of this generation you know really because of the Twitters and the way information flows but you ever go on that Robin hood site where you can see all the retail people buy-
Harris K.: Sell the bag holders, yeah.
Mike Alkin: It’s crazy. I mean as the stocks breaking down, the retail holders are busting out to new highs. On one hand you feel bad because like one of the things I see people go back and forth on Twitter and back and forth talking about price targets and the guys neutral rating or whatever.
They have no idea how the sell side works and how institutional investors view the sell side and that a guy might have a 200 … and they’re analyzing the price target of some sell side analysts which is absolutely freaking meaningless. That he’s got a $200 price target but the stock here is 180. That means it has or a 224 price target not realizing the guy doesn’t want to downgrade it or take the target down because these guys we’re trying to do some banking business.
I mean people are because they believe this guy who could say anything he wants and it with the exception of you know a slap on the wrist and being told to go put his reasonable in his pants on as they negotiate something, but people are going to get hurt here. Real people are going to lose real money but he goes on really pretty much undeterred.
Harris K.: Well, that’s how Ponzi schemes work, you know, the early adapters to a Ponzi scheme usually cash out near the high and make a lot of money and the people who are too stupid to recognize it as a Ponzi scheme are the ones to lose all the money.
I mean, I guess the saving grace is that the average account size of Robin hood isn’t so big. So yeah, for a lot of these people, it’s a big piece of net worth. But in an overall dollar terms and a lot of them are also young, you know, they’ll lose a few thousand dollars, we’ll be very expensive at the time, but cheap overall life lesson.
And hopefully they’ll make different mistakes in the future in their investing career. I know I’ve made a lot of dumb mistakes in my life. And I’ve learned from all of them. And I think people will, be less likely to step into a Ponzi scheme in the future.
Mike Alkin: Last question. What’s your right now, when you look at your book, I know Scorpio is the biggest. What’s next that you think is your table pounding idea?
Harris K.: Table pounding idea, I got two energy stocks that would combine to be number two. I’ve talked about on my side Intero and Sand Ridge. They go down every day, but they’re really cheap, I guess, third name, I had to give you a name. And this is actually my second large position right now.
I’m just making sure I’m right. Tesla obviously is a massive position too but a company called UltraSource. They effectively manage the process of MPO and REO in mortgages in the US. They’re one of the largest players. And because it’s been very few defaults in the mortgage space, because home prices keep going up, their business’ been shrinking for about a decade.
I live in Miami, and I can tell you that property prices here are rolling over very fast. I have friends in California, it’s rolling over. In New York, it’s rolling over. I’ve seen a few of these cycles now. And you have these markets, the bubble markets, so be like San Fran, in Miami, they tend to go up the most, they tend to roll over the first.
And we’re seeing the same thing happen where home prices are rolling over. And it’s part of the whole issue where affordability levels as multiples of income are the highest they’ve ever been. Which makes it very difficult to stay in a home if you’re a stretch buyer and you’re hoping to extract equity gains to pay your mortgage.
And so if prices kind of flat line for a year or two as they have, then they start rolling over. And there’s not a lot of incremental buyers, because affordability is so stretched. So there’s a lot of air beneath where the buyers would be.
I don’t think we’re going to have the 2008-9 sort of crisis, but you’re going to have an increase in non-performing. And I think this business will do very well. It’s kind of cyclical. They’ve taken a ton of costs out of the business over the last decade. So any increase in revenue goes a long way.
Strip out two PE investments they have and it’s trading for about three or four times cash flow right now. And they’re using all the cash to buy back stock and I don’t see-
Mike Alkin: What’s the symbol?
Harris K.: ASPS.
Mike Alkin: Okay.
Harris K.: And I don’t see why this couldn’t trade at 10-15 times cash flow. And I tend to think cash flow numbers will increase quite dramatically as the number of REO’s increase from a very, very low level, where we are today. Just getting back to historic levels of housing defaults would probably increase their earnings quite dramatically.
So I think you have something. I mean, so I’m bearish the market, and I’m looking for ways to express that bearish view without being short. So I mean, you could buy like volatility, you can buy, gold you can buy … I mean, there’s lots of things that give you that sort of exposure buy utilities or whatever [crosstalk 01:43:51]
Mike Alkin: .. a great way to play.
Harris K.: Whatever the safety sectors are. So I want some exposure something, but the problem with like shorting is you only make 100%. Puts a hard to time. Here’s a stock where if the sector does turn and defaults start increasing.
I mean, this could be a multi bagger. And I’m coming into it at such a low multiple on cash flow and all the cash flows going into stock buybacks that I feel like I’m not going to get hurt too bad. And so it’s a stock pick. I haven’t talked about it on my blog yet, I’ll write about it soon. But I think it’s really, really cheap.
Mike Alkin: Great. Tell us about your fund, how do people get ahold of you? And all that stuff.
Harris K.: Sure. If you want to reach me, firstname.lastname@example.org and just email me-
Mike Alkin: How do you spell Pracap?
Harris K.: P-r-a-c-a-p.com
Mike Alkin: Okay.
Harris K.: And if you want to chat, you know, I’m happy to chat. Otherwise, if you want to learn more about my stock picks and what I’m doing, adventures in capitalism, you can sign up. I usually do about three articles a month. I have a full time job also.
But a good way to keep track of what I’m writing about what I’m thinking about. And, you know, I’ve had a bunch of big wins lately, and I’m probably due for a loss, but it’s a good way to keep track of what I’m thinking about and doing.
Mike Alkin: That’s great. Hey, man, I really enjoyed talking.
Harris K.: Hey, thanks a lot for having me on. I’ve been listening to podcast a long time really enjoyed it.
Mike Alkin: Thanks, man. I appreciate it. Speak soon.
Well, I hope you enjoyed the conversation with Kuppy. Really smart guy. Very interesting views of the investing world and how he thinks about it. Hope by talking with him, you got some exposure to how a hedge fund manager thinks about positioning and how we generate ideas. But I really enjoyed talking to him. I’m going to have him back as his time permits, and it was a lot of fun. So until next week, hope you have a great week and we’ll speak to you then. Thanks.
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