1489 FBF: Capital & Crisis with Chris Mayer Author of 'Invest Like A Dealmaker' & 'Secrets of a Former Banking Insider'

Welcome to this week's edition of Flashback Friday. Your opportunity to get some good review by listening to episodes from the past that Jason has hand picked to help you today in the present and propel you into the future. Enjoy.

Welcome to Creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven't thought of before. And a new slant on investing, fresh, new approaches to America's best investment that will enable you to create more wealth and happiness than you ever, ever thought possible. Jason is a genuine self made multi millionaire who not only talks the talk, but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to the Creating wealth show. This is your host, Jason Hartman and we are at episode number 223. Thank you so much for joining us today. We've got a great guest today and this is his second time on the show. It's Chris Mayer and he is pretty much a stock market guy, which might make you wonder why I would have him on in the first place and why I'd have him back. But I had no idea he felt this way until he told me just before we started recording for this interview you're about to hear. And he talked, talked about how incredibly bullish he is on housing right now because of the excellent returns and so forth. So I think you're going to hear some really interesting stuff in this interview and I think you'll like that. So we will have Chris Mayer here in just a moment from Agora Financial, the famous Bill Bonner and Addison Wiggin we had on the show before from Agora. They're a big newsletter company. Anyway, one of the things I wanted to tell you though before we get to that interview is about our exclusive deals. You know, I've been talking to a few potential clients lately and you know, I kind of hear sometimes that people are shopping around, they're talking to different outfits out there that claim to have investment properties and so forth. And what I wanted to tell you is to be really, really careful of this because we have exclusive, exclusive properties in our network that are not available anywhere else. How do I know they're exclusive? Well, because of the agreements that we've set up with some of our partners, our local market specialists in the various cities, but also and more importantly, I've been funding some of the deals and my clients, or our clients I should say have been funding some of the deals. Now I funding them at the source. The source where the local market specialist doing the rehab and the acquisition of that property, buying it usually at the foreclosure auction, they're funding the deals. And so what we do is we make an agreement that any deals we fund plus some additional deals, but the deals we fund for sure are earmarked for our network. So you will not see these deals anywhere else. They are exclusive to us. So you can hear more about them by talking to our investment counselors or going to visit jasonhartman.com and taking advantage of those because we really do have some great properties. You know, I went to happy hour last night with one of our clients here in Scottsdale, Arizona and he's probably listening to the show. So. Hi Kyle, how are you? I asked him about the transaction he just closed with us in the greater Atlanta area and we were talking about it and he pulled out his smartphone and showed me the pro forma and it's the same format that we use. I thought at first he was just going to our website or looking at the pro forma that our investment counselor provided him when he bought the property. But that's not what happened. The pro forma he pulled out. Let me just share this performa with you a little bit. Now this is a pro forma that is in the same format you'll find on all the properties@jason hartman.com. but I won't allow our investment counselors to publish it this way and I won't allow our local market specialist to publish it this way either. But oddly enough I told Kyle that when we were talking and he said, you know, that's true and that's a good idea from a business sense because it limits your liability and so forth. And you know, I had the philosophy that I want to promise less and deliver more and be conservative with all of our projections and so forth. But what's interesting about this is Kyle said, Kyle, our client said that all said this perform is probably very accurate. And you know what, I think he might be right about that. Let me just tell you about this deal. So he purchased a property that was just under 1400 square feet, greater Atlanta area, three bedroom, two bath single family home, $64,900. The initial cash invested, very low down payment. And that was because he was able to do one of these special two step closes. These are pretty hard to do, pretty Rare, but occasionally they are available. And the projected rent on this property, a $64,000 property, 795amonth, positive cash flow, 212 per month or 2540 per year. And the capitalization rate or cap rate, commonly used commercial real estate metric, doesn't tell the whole story. That's why we don't harp on it too much. 11%. And get this, I hope you're bracing yourself or you're sitting down because with the number I'm about to tell you is going to blow your mind. Total Projected Return on Investment 1071%. That's 1 comma, 071% Total Projected Return on investment. Wow. You're probably saying, are you kidding me? Well, I wouldn't blame you for saying that. There's more. So keep listening. Cash on cash return, the pro forma there. 513%. 513%. Well why is that so high? Why are those numbers so incredibly, in fact ridiculously high? Well, because of leverage. This is the power of leverage. The total cash invested in this property at the end of the day after the Property was fully financed.$495.500 bucks. You can still do that occasionally and you can buy a house that way from time to time. It's rare, I have to admit that. But look at the power of leverage. Now think about this. If you buy a property today and you pay all cash, you might do that and you might refinance it in a year or two or in six months or in 45 days, who knows? And turn around and turn in all cash investment that doesn't have those exorbitant returns and turn it into a phenomenal investment. So that's the, the other great thing about income property. You can always change the game along the way. Which reminds me of our members only conference call last night. We have a lot of people on that call, so thank you for joining us. And we do those every month and they're free to members. $20 for non members. And we had a couple of experts on talking about lease purchases and lease options. And you know the way you can always change the game with income property is just fantastic. I mean there's always, there's so much flexibility when you're a direct investor, when you're in control of your own investments and when you've got a vehicle that is so good, like income property, single family and multi family income property far and away in my opinion, the best investment around, certainly the most financing favored and the most tax favored investment around. And it has universal need. But you can change the game any along the way. One of the questions we had on the call last night was if I lease my property on a traditional one year lease, for example, am I able to turn that into a lease purchase deal or a lease option deal? And the answer, of course, sure you are. You can refinance it, you can 1031, exchange it. There are always options, always options there. So just one of the other great, great things about income property. Be sure to join us for the Meet the Masters event. It is almost full, so I don't know the exact numbers on it, but we are getting to capacity on that event and it's coming right up October 14th through the 16th and the room block at the Hyatt Regency Irvine. May by the time you listen to this, be gone. I'm not sure, but give them a call at the Hyatt Regency Irvine. Mention us and hopefully there will be some of those rooms left at $119. Friday night we're gonna do a dinner and we're gonna kind of have some exercises and get to know everybody. And I think that'll be just a lot of fun. It'll create a lot of sort of intimacy so we can work together and accomplish a lot over the weekend. And then we're gonna go, we're gonna go a little bit later on Saturday evening than usual. We're gonna start at 9 on Saturday and go probably into 7, 8, 8, 30 on Saturday night and then all day Sunday as well. So the Meet the Masters event, we have a lot of you that have attended. In fact, you've attended many of them now. We've been doing these five years, six years now, and we do them every spring and every fall. And a lot of you regulars are coming back. So we're glad to see that and we're glad you're getting value out of it. And we will always try our best to keep delivering value to you and to the new people that are coming. So be sure to be there. We were going over the schedule today, Brittany and I, and we've just got a great lineup of speakers. We're always playing with the times, the amount of time each speaker gets to speak, and we get better at every single event and refining that and allowing enough time for the most important, most highly demanded talks and saving time, but also having an appearance from the less highly demanded and faster subjects. So I think you'll really enjoy that. Speaking of membership, we offer a private membership@jasonhartman.com our silver membership is only 199 a year. And this member's website, if you have not been to it lately, if you are a member, go back and check it out because we're really working on this thing. It's got a great user interface. Now the members only podcast episodes are there, which includes all of the archives. We don't have all of the archives up on the feed, but we do have a lot of them. But all of them are in the members only section. And also the special shows like the one I just recorded with famous billionaire hedge fund manager Jim Rogers, who has written many, many books. And he's in the member section as well as Brian Tracy and the fantastic asset protection plans of Garrett Sutton. And just know that in the member section we're going to be giving away some freebies here real soon to members only. And we're constantly just working to improve the value of that. You've got the conference call archive. So every monthly call is arch archived on the site. Members only videos, members only articles, suggested reading lists, things like that, and other links and resources. So take advantage of that Jason hartman.com and also the other big one besides Masters Meet the Masters event I want you to join us for is the Financial Freedom Report, our newsletter. So you can check all that out at the website. So without further ado, let's go to Chris Mayer now. He was on the show, oh, about a Hundred and maybe 130 episodes ago we had him on. And he's a stock market guy. But the reason I like his work, I don't much like stocks. I like being a direct investor. I like being in control of things, obviously. But the reason I like Kris's work so much is because he believes in the concept of investing like a deal maker, which is a really a different approach. And you're going to hear about that in this interview that is also the title of his book for Agora. He writes the Special Situations newsletter and also Capital in Crisis. He's a former banking insider, so he's seen how the system works from the inside. And I think you'll really enjoy this interview.

My name is Andrew and I live in the Pacific Northwest. And I had always thought that investing in real estate would be a good idea and had always kind of thought about investing somewhere near my home and luckily had enough wisdom at a time when I learned about Jason Hartman and his podcast that I was able to apply that wisdom and change my mindset from local investing to national investing and also to just find markets that made a lot more sense than where I live. I'm not an expert in the field in any way, shape or form. I'm not an expert in investing at all. But his group of counselors has great expertise and good advice and has helped me along the way as a beginner with not a whole lot of money to work with from the start. And so far I've got those six properties in about three and a half years and I'm pretty happy about it. And it's all because his team of experts and just his knowledge and his time that he spent doing it, he can really guide you through it. And his podcast is excellent and I highly recommend it for anybody whether you're a beginner or an expert. There's a ton to learn there and it'll help you get to the next level.

It's my pleasure to welcome Chris Mayer back to the show. He has been on before and he is the author of two newsletters for Agora, Financial Capital in Crisis and Mayer's Special Situations. And the thing I like about Chris is that he, although he is a. I'm going to call him a stock person and Kris, you may object to that. I know. So just give me a moment. I'm going to call him a stock person. And you know, I usually don't like to invest in stocks and things like that where you don't have control things. I like being a direct investor. But the great thing about Kris is that he wrote a book called Invest Like a Deal Maker and it's really taking the approach of what is the underlying value of the asset, the commodities. So we talk a lot on the show about buying investment property income, property far below the cost of replacement or far below the cost of construction. And that's what Kris recommends doing with companies. He also has some new opinions and thoughts on the housing market which we'll hear about today and just some really interesting insights. So, Kris, welcome back. How are you?

I'm great. Thanks for having me back. It's good to be on.

You're coming to us from Baltimore, Maryland today?

I am in Baltimore, yep.

Okay, great. Well, tell us a little bit about if you want to expand on my thoughts about investing like a deal maker.

Yeah, I thought you had a pretty good characterization of it. I don't mind being called stock picker. I think that's all right. I think of all Peter lynch and some of those guys. But to talk more about the deal making aspect, what makes that different is that like you actually I'm not really interested in owning stocks, just any stocks. And. And so I'm more interested in thinking like a deal maker, and that is they're thinking about things like the assets and control, and they're thinking about the business as a whole, sort of what can be done with it. As opposed to when you hear a lot of more amateur stock pickers, they'll mostly focus on things like, well, what's the price earnings ratio or what's the dividend yield and what's the growth rate. But when you talk about dealmakers, and a deal maker might be, as an example, somebody like a Carl Icahn or somebody who's buying or selling whole companies, or someone who more of a direct investor and has control over that investment, and they tend to look at them in a much different way. So I've tried to focus my investing activities around sort of the way those folks look at businesses. And one of those ways is you talked about replacement value, and that's really a big part of it. Because the housing analogy is perfect. And I've used that analogy before to describe it to people, how it works. If you can buy a house for less than, significantly less than what it costs you to construct it, you may have a pretty good deal there. You can apply that same kind of analysis in the stock market, where you can sometimes find companies where the assets that you can buy in the stock market cost you far less than what it would cost someone else to build them from scratch.

Absolutely. Now, I want to talk to you a lot about housing today, because that is a primary focus of the show, or I should say real estate investing. But before we do that, let's talk for a moment, if we could, about the financial services industry. Wall street stock pickers. You've talked about investing like a deal maker, which I think is a fantast way to look at it. The investment bankers, the corporate takeover guys back in the 80s, the people that would green mail the board and, you know, cut up the company and sell off the assets. And you know, a lot of people characterize them as evil and so forth, but they really, in a lot of ways had the right idea because they looked at the underlying value of the assets of the company. And sometimes what we really realized from all that stuff going on in the 80s is that the company is worth more when you, you buy the stock to gain control and sell off all the assets, like the pieces of real estate, the equipment, the goodwill, the trademarks, etc. Than actually running the company itself. Right?

That's right. And I think the big problem that we found in American finance and why the corporate takeovers became part of the reason why they came onto the scene so strong is that we found that a lot of American corporations, really what they lacked was owners. They lacked somebody who was there watching the shop. They lacked someone there who was thinking creatively about the assets that they had and what they might do with them. They lacked an entrepreneur. So if you look at some of the best investments over the last 50 years, you'll find that they were almost always had a dominant entrepreneur as part of it. So you look at Walmart, you had Sam Walton, you look at Apple, you had Steve Jobs, you look at Amazon, you had Jeff Bezos. There was just a long, long list of companies where you had this sort of controlling insider and owner and someone who thought long term about the business and had a vested interest in doing the right thing over the long term. And that's really what I'm focusing on. So when I think about dealmakers, I'm also thinking what I'm really looking for is an owner, someone who is there. And what I don't like is the trend in American finance. And really it's a problem all over the world where you have corporate management teams that have really no stake in the businesses that they manage or the stake that they have is given to them with low cost options. So their incentive really isn't for them to think long term about the business. The incentive is for them to keep their cushy positions.

Right. And their big salaries and their bonuses. And what they end up doing is kind of raping and pillaging the company usually and taking too much out of it so that it can't operate correctly. But you know, when you talk about like Sam Walton and Steve Jobs and there are many other examples too, rather than just the quote unquote, like financial people, the business people, what you're talking about there is the guy that is watching the story. Those companies had a, had a soul. They had a person who was at stake who really saw a vision and really cared. No one cares as much as the shopkeeper about the shop. And of course this is why big government doesn't work. This is why socialism doesn't work. That's why communism doesn't work.

Because it's applicable to a wide range of things.

Sure it is. And it's why relationships and marriages don't work. Sometimes.

It's all based on incentives and who has ownership.

Yeah, yeah. And who believes in it and who's at stake for sure. So, so those. What I would say about the companies that you mentioned is that they had a soul, they didn't just have a financial person who was looking to just tear it up and just make their tenure for four or five years.

And you know, the thing about it is too we talk about a lot of the famous examples and we could talk a lot about those. But there's also, and this is why I spent a lot of time trying to ferret out is there are other companies too that people probably have never heard of. That also have you look at a CEO and he's the co founder and he owns 17% of the shares or he owns 25% of the shares or there's a family involved that owns a big stake in the business. And it's remarkable because it's not only that these businesses you mentioned before, that they try to take out as much as they can or we both talk about how they just try to protect their salaries. But when you have a person behind it like that, they're also willing to change and make and push the business forward. Because if you have a caretaker management, they're not necessarily. Sometimes they can take really big risks because they have nothing to lose really. But sometimes they can also be caretakers and they take no risks. And really what you need to thrive is you need an entrepreneur. You need someone who is going to push the company in new directions. I mean Steve Jobs is a classic example. He's had a tremendous impact on Apple. And you can look at Apple while he was CEO, Apple while he wasn't CEO and Apple when he was CEO again, and the performances, there's marked differences between those different periods. And you can do this across the board. You can look at IBM and look at it when the Watsons are running it and then IBM post Watson, you can look at, at almost any company and you can see marketable differences when there's not this person at the helm that you're mentioning. So yeah, I think it's very important.

Yeah, that's a great point. And one of the things I'd say to listeners who are investing in income property is that that person is you. You are that person who has a passion about it and you are the shopkeeper. You're the person who cares instead of relinquishing your hard earned money to some guy at Merrill lynch who sticks it in a couple of mutual funds. And you don't have any soul in that. There's, there' no one has thrown themselves into it. And you know what's interesting Chris, you talk about Steve Jobs and I'd encourage any of our listeners to do this because it's Such a great story. Of course, it's a big story, so it's not really applicable to a lot of investors, but it illustrates the point that you're making. And there's a website. One night I just got kind of interested and I did it. You know, when Steve Jobs. There was some news about his illness on the news, and I just looked it up and it was all of Steve Jobs major speeches from the very beginning of Apple and, you know, all through the years. And I watched them in chronological order, and it took a couple hours, as I recall, to do this, and it was just really interesting. And I remember when I bought my first company back, like 13 years ago, when I'd give a speech, there was that same twinkle in my eye. I had that passion for the business that Steve Jobs had, and that's really important.

Oh, yeah. And it's funny you mentioned that, because I did something similar. I looked at his speeches and there was one commencement address he gave. I think it was at Stanford.

At Stanford, yeah. That was about three years ago. Was awesome.

Yeah, It's a classic. And I certainly encourage anyone to read that. And the passion for what he does clearly comes through there. But other things about Jobs that I've come across also that are interesting is when you look at the number of times he's failed, there's a lot. Again, this is the whole entrepreneurial thing about being creative and trying things, and he's had his share of that, but he's also had tremendous successes. So all this, I think, plays into what we're talking about.

It sure does. And I always say to people, if you want to succeed more often, it's really pretty easy. Just increase your failure rate.

In fact, Bill Bonner, as you know, the founder of Agora, he always says, fail, but fail quickly. So there's no stigma to failing. We just, you know, get it done and move on. If it doesn't work, we do the next thing right.

The problem is most people wallow in it and poor me, and it's a pity party. And they don't move on from their failures. But the failures can be great education. Nixon said, failure that does not destroy you strengthens you. And I firmly believe that's true. But on the financial services industry, before we talk about some specific companies and housing and real estate and that stuff, I just want to. To give the comparison because I think there's sort of maybe three major tiers. There's the tier of the mainstream financial services industry, which I think is. It's been in a bubble for A few decades, the bubble has burst. I think people have discovered that the emperor has no clothes. That walking into Ameriprise or Merrill lynch or any of the other companies that sell you a bill of goods, a bunch of stupid mutual funds, it just doesn't work. I think that industry is over industrial. And it blows my mind. The people I know personally as friends in that industry, nice people, et cetera, but when I ask them questions, their knowledge is just so elementary. I mean, they just don't have any details. It sounds like they listened to the morning call at Merrill lynch and they heard, this is what we're going to say today. And they just go on and they repeat that spiel to all the clients. And you look at the commercials for these companies on tv. I don't mean to pick on Merrill or Ameriprise. I just happen to men those two names, there's a whole industry of them. I'm speaking of them generically because they advertise and they're big, okay? But the commercials, the advertising for these companies is so generic, it is amazing. These big image ads of people retiring and living the good life. And frankly, I don't know anyone who's followed their plan that has achieved that situation.

I guess there's not a lot of people in the Forbes 400 or whatever that have done it by investing in mutual funds. But no, certainly agree with your point. Also, I think a lot of it falls on people because they invest in these things. And I have good friends too, that have money in these mutual funds. And these are people who will go out of their way to save money on gasoline or who go the extra mile when they want to buy a washing machine or anything like that. Checking Consumer Reports, talking to people. And yet when it comes to thousands and thousands of dollars, their life savings or hundreds or thousands, they'll commit on nothing more than. Than the flimsiest of rationale.

I know. Yeah, it's the guy reading all the reviews on Amazon.com before he buys a $200 printer. Yet he's going to.

When it comes to mutual fund, five stars from Morningstar, whatever in it goes.

Exactly, exactly. So the next tier. Okay, that was one tier. I'm just going to call that like the mainstream financial services industry. The next tier is the tier that you mentioned of. I'm going to call them like stock pickers. So these would include. And I'm a big fan of this name that I'm about to mention, by the way. I really want to get them on my show. Like people Like Charles Payne. And I like Charles Payne. I think he's great. Jim Cramer, who maybe I like less. And all of the people out there giving, like, specific stock recommendations, that would be like the next tier, which I think is better than the mainstream financial services industry. But I think the top tier is the tier of investing like a deal maker, and that includes being a direct investor sometimes, or at least investing in something where you know that the founder or the operator has absolute vision and passion for the company and you're buying the assets far below their replacement cost. Would you agree that those are like three different tiers, maybe, that investors interface with out there?

Yeah, I think those are interesting tiers, and I think that two of those things you nailed are very important. I mean, I have a system I use when I pick stocks, and I have an acronym so people can easily remember it. And the acronym is code. And C is cheap, which you mentioned is buying below replacement value. O is for ownership. And we want people to have a stake in the business that we invest in. So that's two of the four right there. The D being disclosures, meaning it has to be something that's transparent. Transparency is very important, meaning that we can understand the business. We know how they make money, we can follow it. And E is for excellent financial condition, which covers for a lot of sins. We don't want to invest in things that have excessive amounts of leverage or that kind of thing. So those are kind of my four pillars of how I look at these stocks.

So say the code again, just so people get it.

Yep. Code C is cheap, specifically buying below replacement value. O is for ownership. We want people have a stake in the business. And D is for disclosure, which has to do with the transparency of the business. We can understand what's going on. And E is for excellent financial condition, so we're not going to want to invest in things that are excessively leveraged. Those are the core principles.

Right, Right. So we've got these three tiers now. Let's talk about the corporate world and the stock world for a moment. And then I want to talk about real estate stuff. What do you like out there and why do you like it?

Yeah, well, that's a good question. I think right now this is a very, very sort of uncertain time. And so one of the things that I've fallen back on is to look at what the insiders themselves are buying. That's been a big part of the last couple months that I've been writing these letters, because one of the most remarkable things we had that we saw in this, call it, the August crash, is that we saw insiders come out of pocket and start buying stock at numbers that we haven't seen since 2009, the early part of 2009. So that certainly got my attention. And that's really kind of an interesting response to a crisis because a lot of people have sold. If you look at individual investors, they're pulling money out of mutual funds at record levels. They have a tendency to take money out at the bottom and put it back in when things are going well. And the insiders tend to give you a different indicator. This is kind of an interesting time because normally, thematically, I might tell you certain stocks I like, whether I like energy or I like this or I like that. But right now it's more patchy. And so I'm picking and choosing among things that where the insiders are buying, where the fundamental business seems to be very profitable and have a bright future. So I can mention specific names if you want. I don't know if that's part of the rules.

No, no, absolutely. I'd love you to mention some specific names. But before you do that, the insider thing, I mean, certainly that seems like great advice. I mean, I want to buy into something where the insider has faith in their own deal. I want my partners in that venture to be at stake. Right. You never want a partner who's not at stake and doesn't have quote, unquote skin in the game. Right, Right.

And some of them have proven to be pretty good buyers of their own stock. There's some of these CEOs you look at and you say, well, the last time I bought the stock was here and look what happened. That sort of thing.

Yeah, absolutely. The one thing, though, that could tilt this equation and make it maybe a little less valid. I'm just trying to be a skeptic here for a moment, so forgive me, but just the general economic environment where there's just loads of money that's been sitting on the sidelines for the last few years. And maybe the reason the insiders are buying more is because they just sort of have. Have this money available that they got to do something with it. And one of the things they're doing is buying their own stock, but they're also doing other stuff, too. Your thoughts on that?

Well, my experience is that the insiders won't buy their own stock unless they're pretty confident. Now, there are some insiders that you'll look and they'll be token purchases. And so those you'll Discount. There are some insiders that buy that maybe they're on the board or something. And that's probably less of a signal than if you had the CEO and the CFO and the chairman of the.

Board all buying the active operations.

The active operations. So there is something to that. And I also would lean back on a lot of the more academic research that's been done on this, which shows that insider purchases as a whole outperform the market. Depending on what study you cite, something between 6 and 10% percentage points a year, there can be outperformance there. So I think there can be a lot of skepticism because when I've talked to people about this, I thought you were going to say, because I've heard this objection before, is people say, well, there's a lot going on with the economy now. Now there's a lot of bad stuff in Europe and bad stuff in the credit market.

So they're moving the money back to.

The thing they, so they don't really know to say. They don't really understand the macro situation, sort of discounting, okay, well, their company might look good, but it might be overwhelmed by events.

So that's the theory of there's no other place to put the money. So they think their company is the best safe haven in other markets.

I got to remember too, with the insiders, they've already, in a way, most of them are betting pretty heavily on the company. I mean, they, they may have a big stake already. They get their salaries and livelihood out of it. For them to then reach in their own pocket and put more money in is usually a pretty strong statement. Of course, there are exceptions and nothing's perfect. But in general, if you can buy, you've got a chairman and CEO and they're buying million dollar shots of the stock at a time and you can buy right alongside them, that's usually something interesting.

I agree with you. I agree with you. The only thing I'd love to see, and I doubt this is even possible, is a study of the amount the insider holds of that company's stock in relation to their own personal net worth. For example. So if an insider buys a million dollars worth of stock in their own company, but their net worth, yeah, but their net worth is 100 million or a billion dollars. That's chicken feed to them, right? It's nothing. So it looks good on paper that, hey, that insider is buying, but they might just be doing that to sort of make it look good. And they might just only have a moderate faith in the company. But they're throwing a few bones at it. Whereas they've got so much net worth outside of. That would be a great study.

Yeah, I don't know that I've seen studies that address it quite that way, but there are studies that show that CEOs that have at least some percentage at stake in the business outperform. So I've seen CEOs where they've done the threshold at 10% and they look at their stocks and compare it to control group where the CEOs own much less percentage and the CEOs which have a bigger percentage in the business do well. So there's something to holding a sizable stake in the business. But I haven't seen any relative to their own network worth, which would be more difficult to do, as you suggest, because you'd have to know their personal financial statements and so forth. Yeah, and a lot of these guys also are. I mean, I've been in this business writing newsletters for seven years and before that I was in corporate banking for 10 years. I mean a lot of them, in addition, even though they may have 10% net worth in a company, there's quite a bit of ego involved in a lot of this. And there's certain pride in being part of a successful company and a company that does well. So some of that, I mean, you know, I don't know that company that they're going to throw money at something deliberately in an effort to deceive people. But I mean, I'm sure that's happened at some point. But as a general rule I think it's probably not the case.

Well, and the ego is definitely a powerful thing. So that's good that they have ego in the game. I want them to have their ego invested in it.

Yeah, you want that?

Absolutely. Well, tell the listeners some of the things you like and why. Maybe three examples would be good.

Okay. Well, one recent example that I've recommended is a company called Federal Movies, which Carl icahn actually owns 76% of the stock. So you definitely have an owner there. And this is a company that makes auto parts and it's fallen quite a bit in the August sell offs, down about $15 or so. And he's been buying it for about two weeks straight in August there during the collapse, he was buying out of a million dollars a shot. Now we know that Carl Icahn is a billionaire, so you can make of that what you will, but he owns 76% of it. And the other thing I like about it is the CEO has particular Incentive. When Icahn took out Federal Mobile bankruptcy, he brought in his own hand picked CEO, a guy named Aliponte, and he has option to buy 4 million shares at 1950. So when the stock hit $27 a share earlier in the year, he didn't sell or exercise any of his options though he could have the options expire in 2014. So I think that's a good incentive there. I think the alignment of all the incentives that I look for are set up really well here at Federal Market Mogul. And I think that the business has gone through a tremendous transformation. So they've taken a lot of costs, they have tremendous opportunity overseas as there are more and more cars. I mean I've done a lot of overseas travel all over the place. Colombia, South Africa just this year, heading to Southeast Asia soon. And everywhere you go, cars, cars, cars, cars. And so there's tremendous opportunity I think for auto parts over the long term. And so Federal Mogul is a play on that. That would be an example of something that I've recommended recently that I talk about transparency.

I mean, why aren't they transparent? These are publicly traded companies, they do all the filings as they're required to by law. How do you evaluate transparency? You're not just going with the basic requirements that the SEC puts out, right?

That's correct, yeah. I mean this is more of a qualitative issue. But I would say that transparency business model has a role in that. So off the bat I'd say that almost any bank would fail transparency, except perhaps some of the smallest banks that are maybe thrifts and have loan portfolios that you can get a pretty good handle on as far as what's in them. But for a large multi billion dollar institution, there's just no way you can get inside that portfolio and get comfortable at all what kind of risks they're taking. And in fact I would argue that the presidents and CEOs of these companies don't really know what kind of risks they're taking.

Well, I think if the last few years has taught us anything. Yeah, that's right, it is that you are.

But beyond that you could take a business model that seems very simple, like say a natural gas pipeline, but it can be made to be very complicated and not transparent with financial engineering. So I've seen pipeline companies that have layered on top of that a number of derivatives buying and selling different natural gas, say forward and so forth. That makes it not transparent. So I think what it comes down to is you have to be able to Understand how the business makes money. And it has to be pretty simple. So most of the time, because I have this limitation, I wind up investing in things that most of the companies I invest in are companies that make something. Because you can generally follow a manufacturing operation. You've got costs of input, they make something and out it goes at a certain price. You can get a better feel for those kind of ideas or even like a retailer, although I haven't recommended any retailers in a very long time, or energy companies. A company that produces natural gas is something, something you can generally get a handle on, or produces oil, real estate companies. So these would be examples. So disclosure is a qualitative test. And you have to really be honest with yourself whether or not you understand what's going on in the business. There are certain red flags I think that you would look for. You have a lot of. We saw this in the last few years in the banks. You have these special purpose off balance sheet joint ventures and things that are contributing income. And basically they're little black boxes. And that's something you have to heavily discount. But in general, it's a qualitative gut feel based on what you have discovered.

You know what I get approached with fairly regularly, Oil and gas exploration deals and oil and gas production deals. And when I say gas, I mean natural gas. And these are just small deals where you know, a guy has a few wells or something. Yeah. And he's raising a million dollars for a fund and he's going to all his friends and family and getting 50 grand from each person type thing. Do you have any thoughts about those?

No, I think that is an area that has been rife with problems in the past. So I would be particularly careful. I mean, you have to really know and trust the people. And I would think you would have to have some basic knowledge of oil and gas so you know what you're getting into. But I haven't recommended any of those. I've seen a number of things like that. I see a lot of these kind of private deals too. Private farmland deals, real estate, oil and gas, Those are all very popular.

It's interesting. And definitely exploration would be incredibly risky versus production, which is less risky. But still there is always a chance for fraud and so forth. So, Chris, you went to Saskatchewan recently and it seems like your trip there you had some thoughts of commodities on your mind, didn't you?

Yes, well, I went to Saskatchewan and I had a couple companies I was visiting. One company that I like very much, that I visited there, which fits a lot of what we're talking about is a company called of a lot, Alliance Grain Traders. And that's a company where the people running it have a big stake in it. The employees and the insiders own, I think together, 35% of the stock. And the founder is still with it. It's only 10 years old. But Saskatchewan is an agricultural powerhouse, really. And Alliance Grain Traders processes, pulses, should be things like chickpeas and lentils and different kinds of beans. I was also going there because I've been raised writing about Saskatchewan. I've probably been writing about it for three or four years, maybe even longer, because some of the farmland deals out there are very interesting because the government there for a long time had a very tough view on foreign investors. It's kind of funny because even if you were a Canadian, let's say you were born in Alberta, you couldn't buy Saskatchewan farmland. You had to be born in Saskatchewan to own Saskatchewan farmland. And they eased those rules. And so the investment started to flow in. And so there's a lot of interesting opportunities in Saskatchewan.

It seems like really the safe play for the future is commodity oriented things. You mentioned manufacturing companies, companies that make something tangible stuff. It's always great to hear about high flyers like Groupon that may not be such a high flyer when it finally has its IPO.

$50 billion for Facebook or something.

Yeah, and Facebook and all these kind of like virtual companies. But if you ask me, the population is increasing dramatically. We're gonna, we're gonna hit another billion mark this year. Or maybe we just did hit that. I mean, nobody exactly knows the world population, but they have lots of stats on that. And you know, people consume the three things people need, Chris, for sure, which, which we absolutely know. They don't need a new pair of Nikes. They don't need a new iPhone. They'd love to have all these things, but we know for sure they need food, clothing and shelter.

Yeah, food, food, water. Those are big, big investment themes.

Yeah, yeah. No question about it. But people don't have the chance to do those directly in most cases. And we've talked about the dealmaker philosophy, which I couldn't agree with more. But talk to us a little bit about housing, if you would.

Well, a little background first, because I have been a housing bear for a long time.

I know that. And that's why I want to hear from you on this.

That's right, yeah. And I mean, I go back as far as I think it was late 2002. I wrote a piece saying that fannie and Freddie Mac would go bankrupt and the taxpayers would eventually have to bail them out. And I've been a long time talking and writing about the housing bubble. So only recently this year I reversed that position. So I think now that we went through this whole big housing bubble and I think the thing is dead and we are closer to the bottom than we are the next peak. I think that's for sure. I mean, you never call the exact bottom, but I think housing looks interesting. And I'll tell you, I talk to a lot of different investors and, and other people who are doing different things. And one of the things that has struck me recently is the amount of institutional money that has started to look at housing as an investment where they're renting out the house and there's all kinds of boots on the ground, viewpoints from different people. But in general, what I'm hearing is that it's not so difficult to buy a home today and rent it and get an 8 to 12% cash yield on your investment. And I love that idea because I think you look at housing prices, they've come down, down tremendously. I mean, they've plummeted. And in some markets, I mean, it depends, there's a lot of ways to measure this. You can look at price to income and all that sort of thing, but we're definitely on the bottom rung of all these different valuation methods. So I think though it may take years before housing prices surge forward or we have another housing boom now, I think is a pretty good position to a pretty good time to establish some positions in say, the rental home market and just sort of wait out the. I mean, where can you get 8% to 12% on a physical tangible asset again, that has value? And this is another point in the valuation is that most of these houses now you can easily find houses trading for well below replacement value, what it would cost you to rebuild them. I think it's a very interesting place to be right now. I would say things look up from here for housing, as crazy as it sounds to say it.

Yeah. But I don't think it's crazy at all. I agree with you completely. But it's interesting to hear that from a guy who's been bearish on housing for so many years. I mean, you thought housing was a bad deal in 2002. And then of course, the speculative frenzy and the money pump from the Greenspan pump, I'll call it post 9 11, Greenspan pump was just kicking out ridiculous amounts of money into housing for years. And the Price is just, I mean, it was absurdity what was going on.

Oh yeah. I mean, we've seen this happen with all kinds of speculative blow offs. I mean, I remember writing bearishly about the stock market in 97. Of course, you know, they were three years to go before it peaked and they were tremendous. You know, there's still a lot of tremendous room on that. So these things always go longer. But I think now too, when you look at the, the reason why I say it sounds nutty. It doesn't sound nutty to you. And I'm not surprised because you're actually more of a practitioner who's in the market and sees the deals you can do. And most of the people I talk to like that, completely agree with the position I'm saying. But I do get a lot of resistance from readers who don't see that and they just read sort of the headlines, which is still a lot of scary stuff about housing. So I mean, there's no question, if you look at the US mortgage market, something like 45% of US mortgages are still in some state of trouble. They're either underwater or they're in foreclosure or something. But if you look at the individual deal as an investor, I think it's pretty attractive.

Well, so when you invest in stocks and when you invest in companies, do you invest? Are you an income oriented investor or are you capital appreciation? I have a feeling I know the answer to this, but I just want to ask you.

Yeah, I mean, I would say that I'm indifferent to the two. When I'm looking at a stock, I'm looking sort of at total return. So sometimes, sometimes income will play into it, but sometimes it won't at all. I mean, if I can, you know, it just depends on the situation. I would say I'm indifferent to either or what I want is the greatest total return overall that I think I can get.

See, I would say that what, what people just fail to understand about real estate is that it's a multidimensional asset class. And companies, if they're dividend paying, have two dimensions. They have capital appreciation and they have income. They have dividends. But, but with, with real estate, if it's the right kind of real estate, you have several dimensions. You have income. And that's what you're saying when you say look at, just get 8 to 12% rental yield return and wait it out with no capital appreciation, who knows which way that's going to go? Right? You're basically like investing in a bond or A dividend paying stock. The principal value of the bond or the stock can go up or down, but it still spins off the income for you, then you've got the potential for capital appreciation. And I just want to propose an idea to you, Chris. I don't think we are going to see much if any real appreciation measured in real or constant dollars a long time because for that to happen we have to have incomes increase. And I don't think that's looking good for the foreseeable future here for the next five years or so. But I do think we will have inflation and so I think in nominal dollars we'll have increase in prices.

Yes, I think if you look at different times of rapid inflation, that houses in general have been a pretty good hedge on that. Real estate in general.

Certainly they have, but it gets better because if you let leverage the property, say you put 20% down, you don't just hedge against inflation. I had a guy on my show.

You have an active short against the dollar, basically. Active bet against the purchasing power of the dollar. That's the brilliant thing about it. And you can fix it at such low interest rates now. Yeah, I think it's an incredible deal.

It is incredible because think about it, if you put 20% down, you're leveraging or shorting the dollar by a 5 to 1 ratio, right. So if the inflation rate is 5% but you've leveraged and you're not paying the debt service cost on the leverage, the tenant is, you've really outmaneuvered inflation. Assuming the real estate keeps even pace with inflation by a 5 to 1 ratio.

Sure.

Okay.

So that's a big part of it.

Yeah, huge, huge. But it gets even better because see, I don't think we're going to have any real appreciation for a long time, but I think we could have what I call regression to replacement cost. So if you buy a property now for say $50 a square foot and say that it cost $100 a square foot, square foot to rebuild that property today, plus you're basically getting the land for free. So in some of the markets we like, like Dallas, Phoenix, Indianapolis, Atlanta and some others, the lot values are cheap in those markets. I mean, you know, it only costs for a single family home lot 15 to $25,000.

Yeah, I mean, I've heard some prices in Phoenix have been rolled back to where they were in 94.

Oh yeah. No, it's amazing. I mean, listen, I just recently moved to Arizona from California. I left Newport Port beach to move to Scottsdale and some people think I'm crazy. I think I'm brilliant. I like it a lot better out here. And yeah, it's amazing. I mean, things are half. Half price. I mean, this was obviously a huge bubble here and it blew up. So even if there's no real appreciation, all you have to have happen to really double the price of these properties or even triple them, because sometimes we buy it one third the value of replacement is just have what I call regression to replacement costs. What do you think of that?

No, I think that's exactly right. I think long term you do have a regression to replacement. And I see that in the stock market also a lot of different assets, things will fall dramatically out of favor for a while. But over time, markets kind of correct themselves. And I think that will happen. Housing, one way or the other, there'll be some supply that will disappear. There'll be houses that are torn down or whatever. They're still. Demographically, the US is still in a pretty decent place, especially compared to Western Europe. Europe, we've got a country of 300 million still growing that's going to just naturally soak up some supply. I mean, household formation in the US is still growing apace and the market will adjust. Housing starts are at very, very low levels and it will be patchy. So I mean, you mentioned your specific market, and I think that's important to note, is that there are some markets that will come back and that will be attractive, and there are some that may never come back. I know reading different stories about whole towns in Florida that basically grew up only because of the housing bubble and there's really no reason otherwise for the town to exist. I'd be much less inclined to make an investment there than say, like a Tampa. Well, you know, Tampa, eventually, that's a city. It's got a reason for being. It's been there for a long time that will come back and Phoenix will come back and some of the other places will come back. But I think you do have to.

Be kind of choosy and just. I think what you're referring to in Florida is the central Florida areas.

That's right.

Those were literally nothing more than a central symptom of Wall street and bank money flowing at developers.

Whole towns created just out of credit, and all they are is houses in the middle where nothing else is.

Absolutely. The point I want to make there is, I think regression to replacement costs is not appreciation. I don't think that's appreciation. It's just regression.

Right. Although it depends where you Bought. Right. If you bought half, if you bought it for half replacement value, it'll be appreciation for you specifically, but it's just getting back to a more normal market.

So, Chris, that's interesting what you say about housing, especially because you've been a bear for so many years. So I really like to hear that. It gives me a lot of confidence that I'm doing the right thing. But I'd be interested to hear your take on Warren Buffett, because, you know, I'm beginning to think Warren Buffett is like a shill for the Obama administration. I mean, you know, he's throwing fundraisers for Obama and he's doing things that just don't make any sense. I mean, but he's got a huge insider advantage, like, you know, he just bought a bunch of B of A stuff, stock. Did that make sense?

And he's also hypocritical because he'll talk about taxes and that, and then he'll be sure that when he does these deals, he's in preferred stock, 70% of the dividends of which are tax deductible and so on and so forth. I mean, his actions betray what he's saying. If he wants to pay more taxes, that's just one issue. I mean, nobody's stopping him from writing a much bigger check to the Treasury. I'm sure they'll take whatever money they get.

But for some reason he says that his taxes should go, yet he doesn't do that.

He doesn't do that. That's right. That's exactly the point.

And what I heard about it is his famous line, his secretary pays more taxes than he does, is that he only pays himself a $100,000 a year actual salary, and he takes the rest of his money in a more preferred means that's taxed at a much lower rate. And it's interesting to me that Warren Buffett's secretary doesn't make 100 grand a year. I mean, you're the secretary for the second richest man in the United States of America and one of the richest people on the planet. I don't think he's paying her enough.

When it comes to Warren Buffett. I think that as investors, it's definitely when you're looking to learn about investing, to study his career, because it's been a remarkable run. But the Warren Buffett, the last, I don't know, three to five years or so, has been much more of a political animal. Not just the taxes, but on all kinds of issues. Like you say, he's fallen down Some pegs in a lot of people's mind.

But one of the things, when I read Buffett biographies and so forth, I kind of like his philosophy. It's sort of the value investing buy good sensible companies, not the high flyers that just have underlying value and operate and hold. And that sort of strikes me as a good philosophy.

Yeah. And I think you can divide Warren Buffett kind of in three careers. There's sort of the early Warren Buffett when he ran the first Buffett partnership and he was involved in special situations and doing things like Ben Graham, cigar butt investing. And then there was the middle years where he became more the Warren Buffett that most people know, the guy who espouses all that folksy investing wisdom and common sense advice that you talked about. Then there's the latter years where he's become so large, where he can really only buy whole companies, where he's become much more, I think less interesting. The study hasn't invested investor. And where he's become much more political.

Yeah, it's interesting. That's a good way to divide him up. Definitely. Well, hey Chris, what else would you like people to know before you go? And of course please give out your website. And you publish two different newsletters people should know about and tell us where they can get those.

Yes, I would say the best place to go is the DailyReckoning.com I write columns there, Daily Reckoning, it's a free E letter, comes out every day and you can find out more about my newsletters there. And like I say, it's free, so. So it can't beat that.

Absolutely. And it's a great newsletter. Bill Bonner is a terrific writer and I just really enjoy the philosophy. I will say it's a little long winded, but it's entertaining. I love the way they just sort of bash the left leaning political world and so forth. It's funny, it's really good. But in closing, you know, what thoughts would you have for people looking forward? And many thoughts you have about the future of the economy, inflationary, deflationary, insolvency.

For the United States, whatever you got, the inflation thing. I tend to think that we'll see it sooner or later. I mean, this is one of those things where a lot of people have been looking for it, including me, and have been wrong for a few years, but I think it's inevitable. And this most recent episode with Operation Twist where they're driving down interest rates even further, I mean, there just can't be much more room to go there. So I think that we'll see more inflation. And overall, I would say, though, that there's still a lot of investment opportunity out there. So I try not to get so down too much on the macro economy because there's lots of instances in the past where you can look at the two and they don't necessarily dance together. In other words, you can make pretty good investments in bad times. And there's lots and lots of examples of that. So I would say stick with those basic principles that we've been talking about in this interview. Look for to invest with people, you know that have track records that are their incentives are lined up with yours. Stay picky. The great thing about investing is you don't have to invest. You can sort of wait until that perfect pitch comes along. So that's really my parting wisdom, I guess.

Fantastic. Well, Chris Mayer, thank you so much for joining us today. Appreciate having you on the show.

That's been fun. Thank you.

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