Warren Buffett, Regulation and Education

Overstock.com CEO Patrick Byrne discusses his close relationship with Warren Buffett and why Wall Street hates him.

Dan Ferris and Aaron interview the CEO of Overstock.com and the Chairman of the Foundation for Educational Choice, Patrick Byrne. Byrne discusses his relationship with mentor Warren Buffett, terrible public school systems, SEC violations and regulators, and why he was Wall Street’s most hated man just before the 2008 financial crisis.

 

Visit the Foundation for Educational Choice to find out more about Byrne's quest for education reform: http://www.edchoice.org/

 

Patrick Byrne hammers Big Government in his interview. You can read an article Porter wrote a few years ago about why government is killing jobs and what he offers readers to cure this ill: http://www.thedailycrux.com/Article/33140/Government_Stupidity

 

 

[Music playing]

 

It’s time for another episode of Stansberry Radio, the show that’s too loud for radio.

 

Aaron Brabham: Welcome to another episode of Stansberry Radio. I’m Aaron Brabham. Porter is out this week. However, I’m fortunate to have Dan Ferris as my guest host again. Dan, how you doing?

 

Dan Ferris: I’m good, Aaron. How are you doing?

 

Aaron Brabham: I’m doing great. As most of you know, Dan runs The 12% Letter and Extreme Value. We originally scheduled Ed Feulner, the president of The Heritage Foundation. However, he had to cancel at the last minute. Fortunately, Patrick Byrne, the president, CEO and chairman of the board of Overstock.com is joining us.

 

Mr. Byrne is also the chairman of The Friedman Foundation, a nonprofit organization dedicated to school choice and educational reform. We’ve been receiving a lot of mail from our listeners via our feedback@stansberryradio.com, as well as our newly created radio hotline, 855SARadio. That’s 855-727-2346. Keep bringing your comments and suggestions for guests. We appreciate everything that you guys do to give back to us.

 

All right, Dan, I wanna start off the show with a topic that’s right up your alley. It’s actually an e-mail that somebody wrote in, a listener. It’s Dino from Toronto, Canada. Now, before I go into this e-mail, a lot of it was geared towards like personal advice and just so all of our listeners know out there, the SEC bars us from giving an personal advice at all, so I’ve kinda reworded your question so that we can kind of make it more general. So, here’s what he has to say.

 

“I’ve been following the world-dominator strategy for a year now, and I’ve purchased all the stocks you’ve recommended. However, I’m concerned about the potential collapse of the markets and the U.S dollar losing its world reserve currency status, so number one, won’t silver, gold and short selling be a more effective strategy as means to maintain wealth in a collapse instead of purchasing Wal-Mart, Hershey’s and Microsoft that are denominated in U.S. dollars? The value of these stocks, even with the short-selling strategy, would significantly dissipate in such an event.” Dan, I’d like to hear your reply to that.

 

Dan Ferris: Well, there’s a lot going on here already. Being concerned about the potential collapse of the stock market is a really sticky thing to do as an investor, ‘cause it hardly ever happens. And when it does happen, the best thing you can do is buy into it. I mean, those are the moments that make people rich, but when you have lots of cash on hand and the market crashes, or even just keep buying on a regular basis, if you’re somebody who invests a little bit every month, and you just keep investing straight through 2008 and 2009, you’re gonna come out the other side looking pretty good.

 

So, this whole idea of being worried about a collapse like you’re gonna go to sleep Monday night and wake up Tuesday morning and it’s all gonna collapse is a bit of a problem. I don’t think it happens that way. As far as the U.S. dollar losing its world reserve currency status, you know, Aaron, I don’t care if we’re using – I got a box of Lorna Doones on my desk. If it’s Lorna Doones or money starting tomorrow, I’m willing to pay a lot more Lorna Doones for a share of Microsoft than the market is currently. So, I don’t worry about that at all.

 

As far as, you know, the – the other part of this, won’t gold, silver and short selling be a more effective strategy to maintain your wealth in a collapse, if you can time something like – if you can time a great short sale, more power to you. We’ve certainly had some pretty decent luck or we’ve been smart occasionally around Stansberry with short sales. Porter’s pretty good at it, and Jeff Clark is pretty good at it, and some others. And so, short selling, though, to put all your eggs in that one basket, man, that’s a terrible idea. People get up every morning.

 

They go to work. They keep on keeping on. They human race keeps on keeping on. If things get really, really horrible, if it gets to be like Europe in 1940s or – and even 1930s with the world in a depression and stuff, then we can – if you think that’s gonna happen, then maybe you should do some shorting. But, even then you only had brief windows where shorting made you a lot of money, and the rest of the time it was losing you money, so – and gold and silver are similar.

 

They look fantastic if the whole world goes straight to hell in a hand basket, and I own them. I own gold and silver, physical gold and silver, and I got no intention of letting go of it. But, I own them for the same reason that I would still buy car insurance even if it weren’t mandatory. I hope I never have to use it, so it says the – the questioner says the value of these stocks, even with a short-selling strategy, would dissipate, would significantly dissipate in such an event. I don’t really know that that’s true.

 

I mean, I’ll still love Hersey bars, and I’ll still be looking for a cheap place to buy stuff, like Wal-Mart, and most of all, please don’t change the operating system or the software on my computer, because I really don’t wanna have to learn a new one, so Microsoft would probably still be a good bet.

 

Aaron Brabham: To me, your strategy is the ultimate set it and forget it, especially if you’re still working and you’re putting away money in your 401(k) and you have some matching. It’s just put a certain amount into it, reinvest the dividends and just forget about it.

 

Dan Ferris: Yeah. I mean, you know, there’s forget about it and then there’s forget about it. I mean, you gotta look in on it every now and then, but it’s not like – you’re not watching a levered options trade or something. I mean, it’s just there are highly productive, highly capital efficient as the questioner noted, highly well – well-operated, highly capital-efficient businesses out there. And you can hardly do better over the long term than to own a piece of them at – purchased at a good price, of course, and that – it takes a lot to change that. It takes like World War II or something to change that, ‘cause we’ve been through all kinds of other stuff in the past 100 years aside from these very brief episodes when things looked really horrible.

 

And the capital-efficient, wonderful businesses just keeped on keeping on, and even over the long term U.S. corporate America has done a good job. The U.S. stocks, if you read Triumph of the Optimists, which is a great reference work by three London Business School economists – I can’t remember their name offhand, but Triumph of the Optimists is a study of global investment returns over 101 years. And it showed that U.S. stocks from 1900 to 2000 made, I think, 6.7 percent a year after inflation, total return, so that’s really great. Corporate America is doing its job, and Warren Buffett has talked about this. He said, “Corporate America does its job, but investors stink at their job, because they’re always buying at the top and selling at the bottom,” because they think they can do something about market – maybe the market will collapse.

 

And maybe the dollar will lose its currency status, and maybe the U.S. dollar will diminish so much in value that the stock market will look really horrible in five or ten years. And over the long term, none of this seems to matter, and I wrote about – I even wrote about politics once in a recent newsletter. I said, “Shopping trumps politics,” meaning that business trumps a lot of political problems, so, I don’t know, it’s – I agree. It’s, over the long term, it’s hard to beat owning a piece of the greatest businesses in the world.

 

Aaron Brabham: Well, thanks for the – answering that, Dan. That’s very helpful. Hopefully, our listeners will take note and look into one of your newsletters. I mean, look, these things, they’re not expensive. Your 12% Letter is $39.00 for a year. Try it for four months. Give us a call if you don’t like it. You get your $39.00 back. To me, there is no better deal in the world than that if you’re looking for – to learn about value and invest the safe way, so…

 

Dan Ferris: Gosh, I agree with that.

 

Aaron Brabham: Yeah, I kinda figured you would. All right, Dan, well now it’s time for our guest. Patrick, welcome to Stansberry Radio.

 

Patrick Byrne: Thank you, Aaron. It’s always an honor to talk to value investors.

 

Aaron Brabham: Well, your father worked with Warren Buffett at Berkshire. Did that have any influence with your family, and especially you growing up as to how you got involved in finance?

 

Patrick Byrne: Absolutely. I was extraordinarily lucky, among my many tailwinds in life, and Lord knows I’ve had lot of tailwinds. One was when I was 13 years old, this kinda funny guy from Nebraska, who was not famous then, was not well known at all – well, he was well known among a small group on Wall Street, but his name wasn’t in the paper or anything like that. But, he used to come and stay with us, and he – my parents, it was always rare – I mean, was always a surprise that they would let me skip school, but they would let me skip school just to hang out with this fellow. And he would spend afternoons just drinking his Pepsi and – with cherry syrup in it – and talking to me, and in the space of half a dozen or a dozen afternoons, it affected – it deflected, I guess I should say, the whole trajectory of my life. And he talked – he – I remember him teaching me these very simple things that just made – I remember him saying – so, this was, of course, Warren Buffett, but it was Warren Buffett before he became the superstar.

 

In fact, I remember – I knew him about ten years before – I remember when his name started showing up in the paper, and I was – it seemed so funny that this fellow I knew from Nebraska was starting to just become this legend. But, he would teach me these things. Like he would say, you know, “Patrick, I’m gonna tell you something that people either get in five minutes or they never get in all their life,” and I’d get a pencil and paper. I’d get all excited thinking there was some secret formula, and he said, “Look, when you buy a share of stock, you buy it – imagine that the market’s gonna shut down for ten years tomorrow. Would you buy that share of stock or not?”

 

And so, that gets you thinking about it so you’re not trying to get a piece of paper on an uptick. You’re actually thinking about you’re getting a slice of a company, and do you wanna own the slice of that company for the next ten years? I’d say, “Mr. Buffett, is that – are you telling me that’s so simple? Are you saying adults don’t understand that?” And he said, “Patrick, I can promise you 95 percent of the money in the market does not think that way. They’re just trying to get things on an uptick when they can sell it – ”

 

So, just when you’re 13 or 14 and you’re just building a worldview, it’s – I didn’t have to unlearn so much stuff that I’m afraid that I would have if I had taken – had a more conventional education, ‘cause it just seemed – he made everything seem so simple and so obvious. That’s really served me well my whole life, as has my – I would – it would be self-aggrandizing to call him my friend. I don’t call him my friend. Actually, I call him my rabbi, and that’s our joke. It’s he’s my rabbi, and so I just have always turned to him for advice, and he’s never stopped teaching me. He’s actually –

 

Dan Ferris: Man, you’re lucky, Patrick.

 

Patrick Byrne: Yeah, that – well, I said, it was a lucky break, but it was – he’s never stopped [audio skip] – my view is he’s just a great teacher. He’s this wonderful teacher who then went on, became this very famous, mythical man, but he’s really – I think of him first and foremost as a teacher, and he’s used his career to try to teach Americans – to try to teach us something. You know, there’s a wonderful –

 

Dan Ferris: Yeah, he’s taught us a lot.

 

Patrick Byrne: – book – I’m sorry?

 

Dan Ferris: I was just gonna say he’s taught us quite a bit about investing and finance and what’s right and wrong.

 

Patrick Byrne: Right, right.

 

Dan Ferris: Do you keep in touch with him now? Like do you talk to him about Overstock and some of the other things you’re doing at all?

 

Patrick Byrne: I do keep in touch with him, but the particulars of – we have an agreement. I don’t go into the particulars of anything like that. He’s fine with me telling the world about the things that he has taught me. He’s happy that I get a chance to share them with the world, I think, but I don’t like document the other stuff.

 

Aaron Brabham: Sure. No problem at all. Now, in 2002 you took Overstock.com public. However, you opted for a Dutch option IPO. What were your reasons for doing this, and most important, what was the backlash from the big investment banks that didn’t receive their ridiculous fees that they’re used to?

 

Patrick Byrne: Well, good question. You guys have done your homework. I took the company – we were the first company to go public with a Dutch auction, which was pioneered by Bill Hambrecht, and it’s a marvelous invention, because the conventional IPO system isn’t just broken. It’s inherently – it’s intrinsically corrupt. The conventional IPO system is you start a company, and I’m a big banker.

 

I come to you and I say, “I’ll take you public,” and I go out and I try to chum the market. I get it all excited about you. I try to – I tell you I’m gonna get you ten bucks a share when I take you public. I take you around in a roadshow, and I get the market all excited and people ready, and then when it comes to pricing the deal, I deliberately misprice it. I price it cheaper than I have to, and I shovel it, I the banker shovel it to some greasy hedge fund clients of mine that get the quick flip.

 

They get – the stock doubles, and it goes up 50 percent in the first week, and they flip out of it, and then those hedge funds give me, the banker, a kickback. That’s how – of about 30 to 40 percent. That’s the conventional IPO system, and I don’t know anybody on Wall Street over the age of 30 who does not know about this. That’s how it works, and whenever you see – anyone with any economic intuition should understand when a company comes public and goes up 50 percent in the first few days or a week, that’s not good. It means that it was mispriced to begin with.

 

And it’s a general I’d say principle of human behavior that whenever you have somebody in power in a position to allocate a guaranteed profit, you get kickbacks. It doesn’t matter if you’re talking about a corrupt customs official in Uruguay or you’re talking about a white-shoe Wall Street banker. What they wanna do is be in the position to allocate a guaranteed profit, and then they get a – they get to share a piece of it. So, that whole system is destroyed by a Dutch auction, and that’s what Bill Hambrecht pioneered, where you build a bid stack. The roadshow ends with instead of a banker telling you what the price is gonna be, you see how much demand there is and you match the demand and you figure out what price will move the million shares that you wanna sell.

 

And you set the price there, maybe with a little bit of a discount to thank the people or that first came in, so – that come in in the auction to pay them, compensate them for taking the risk. But, it gets the right price the first time, and hence you don’t get these wild swings, like some IPOs, especially in the tech industry where it’s so easy to chum the market and get everybody – you can create big swings. And the bankers make money on both sides of the swing, so it’s just an intrinsically much better system. However, what it does is it destroys the – the economists will call it a rent-seeking position of the banker. It destroys that insiders' game that I just described, and so Wall Street is dead set against it.

 

They stand shoulder to shoulder against anyone using the system, and they really try – I mean, I was warned, “You will be,” by a white-shoe Wall Street banker who wanted our business, and when I told him we were going with Hambrecht, he told me, “If you go ahead with Hambrecht, you will be a pariah for life on Wall Street if you go ahead with that deal.” And I said, “Fine, I’m – I’ll be a pariah for life,” and it turned out – you know, I’m glad he at least passed that along. I would say that it’s – he turned out to be accurate.

 

Dan Ferris: Well, that’s like being a pariah in a prison yard. I mean –

 

Patrick Byrne: Yeah. I was told in 2007 – somebody sat me down on – a good Wall Street guy, not a bad guy, but sort of a elder statesman in the industry. He sat me down and said, “I just want you to know, you have become the most hated man I have ever known in my entire life. Here on Wall Street, you used to be kind of a golden boy, but now they – you could kill people and they wouldn’t hate you like they hate you in this town.” So, they can carve that on my tombstone for all I care, that in 2007, this was the most hated man on Wall Street. That’s a –

 

Dan Ferris: It’s an enviable title.

 

Patrick Byrne: Thank you.

 

Dan Ferris: I mean, really.

 

Aaron Brabham: Did it –

 

Dan Ferris: We can’t all be so hated.

 

Aaron Brabham: Did it lessen the blow any when Google chose to go with an open IPO format, take a little heat off you?

 

Patrick Byrne: No. I thought that was wonderful of Google. I thought it was gutsy and an example of do no wrong, and I thought that was a wonderful thing. Now, I think that they got sabotaged. What they should have done – when we went through the IPO, and there were a number of ABCD, big-bulge bracket banks who wanted the deal, an we said, “We’re going – we’ll – we want you on the deal, but we’re gonna use Hambrecht and the Dutch auction,” they all said, “Nope. It’s us or the highway.”

 

So, I took the highway. When Google – Google was too big and powerful already when they went public for the banks to do that, so about 23 or 26 banks signed up, and they signed up saying that they would cooperate with a Dutch auction. And then, I know for a fact that several of those big banks deliberately sabotaged the deal, and that’s why – I think that deal was supposed to price at about 120, and they ended up having to price it at about 85, because Wall Street does not wanna see the Dutch auction get any traction. And so, it got priced at 85, and then as soon as it started trading, it got back to where it should have been anyway, but they had bankers on their deal who deliberately mispriced – who deliberately poured cold water on the demand and turned clients away and didn’t really let a true bid stack get built. So, but I think it was great that Google did it, and I doubt they care.

 

They made their point or they put a big exclamation next to my point, and it’s a much bigger exclamation point than I was able to make myself.

 

Dan Ferris: Patrick, this sounds like a huge story that somebody ought to cover and make a big expose out of it, and there ought to be investigations. Why isn’t there? Have I missed like two years of newspaper clippings or something? I feel like –

 

Patrick Byrne: Well –

 

Dan Ferris: – everybody knows about this. Why don’t they do something about it?

 

Patrick Byrne: Well, the – it’s funny you say that, because only now is there some congressional interest in the IPO system, but – which I encourage, but the – or I’m glad that it’s there. In my opinion, in general, the New York Financial Press, and I don’t mean everybody. There are some very good journalists, Gretchen Morgenson, Gasparino, Taibbi at the Rolling Stone. The Economist is doing good things now, but in general, the New York – and I didn’t name them all. There is other good ones, but in general, the New York Financial Press has the same relation to the New York financial industry as sports journalists have to Michael Jordan, and, you know, you’re not going to write – they don’t write – they ended up – they end up carrying the water for their industry.

 

They’re not gonna write a critical, real – they’re not gonna write critical piece about their industry, which is why in 2004, 2005, 2006 I already smelled skunk on Wall Street about much more than the IPO system. I knew that there were heads – there was rampant insider trading had become a business model for a constellation of hedge funds, the expert network system, the market manipulation, naked short selling, host of other things, and that the SEC was asleep at the switch. It had all become very clear to me by the middle part of the last decade, and I started bringing these things to the press, and the press just roasted me. And I was warned, “If you go and make noise about this, you will be roasted.” And I thought –

 

Dan Ferris: Who warned you?

 

Patrick Byrne: A hedge fund.

 

Dan Ferris: Really?

 

Patrick Byrne: A hedge fund and the CEO of another company, the CEO of a financial company told me, “These guys have connections to – into the federal government, and if you – you will become the object of – well, endless federal investigations,” and my company, “Patrick,” he told me, “we started – when we complain about some of the same things, we’ve just become the target of endless federal investigations. I’ve had to create a department of investigations,” he told me, that group of full lawyers who do [audio skip] answer federal investigations. Well, that all sounded crazy to me in 2004. I started doing this. I thought I was trying – just like I did the Dutch auction, trying to be a good citizen, and I did it just to try to make a point and move the system and – a little bit.

 

In 2004, when I started making noises about some of these other things I was finding, since 2004, I’ve been essentially under perpetual federal investigation. They open one up. It goes nowhere. It costs me two million bucks. They drop it, and then they start a new one, and they – I’ve been under federal investigation of one kind or another since 2004.

 

I don’t spend ten minutes a year dealing with it. I basically have a department of investigations now, and the Feds subpoena me all they want, and I just let these lawyers handle it, because – oh, and we have used Freedom of Information Act requests to find out what the heck is going on, and guess what? It turns out there is a – there are hedge funds who just have whole lobbying efforts. They lobby the SEC and the FTC. They just lobby them continuously to go after me, to start investigations on me, and it’s the same hedge funds who sell the short.

 

So, we’ve gotten those documents in Freedom of Information Act requests, and the Feds just haven’t – don’t understand how they’re being used as finger puppets by these dirty hedge funds. Although I am happy to see that there’s been a massive – finally in the last two years – a massive federal investigation into Wall Street has opened, and it’s opened on exactly that constellation of hedge funds that I was talking about. And everybody knows who the dirty players are on Wall Street. There’s a constellation of about 15 hedge funds centered on, I believe, Steven Cohen and SAC Capital who are behind a lot of the misdeeds, and now I read in The New York Times that, what do you know, Steven Cohen is at this – the crosshairs of this federal investigation, which has gotten 62 indictments and 60 convictions in the last year. So, anyway, it’s been a nasty –

 

Dan Ferris: Is Steven Cohen the Sith Lord, Patrick?

 

Patrick Byrne: Well, I – yes, and I refer to them as the Sith. I refer to this whole crew as the Sith, and being a public company CEO out there in ’02, ’03, ’04, I’m mingling, mingling in Greenwich, Connecticut, and Manhattan. It just became clear to me what was going on. It’s a racket that makes it impossible for the mom and pop retail investor to get a fair shake. And it also – some of their activities create systemic risk, like naked short selling and some related things create systemic risk.

 

Dan Ferris: Patrick, do you think the SEC actually enables these people? I mean, you said your – you talk about how the Feds won’t go after them, but the Feds wanna work in that industry, right? The –

 

Patrick Byrne: Exactly.

 

Dan Ferris: – regulators wanna work in the hedge fund industry, so they’re not gonna go after them.

 

Patrick Byrne: You have it. You know, ten years or eight years ago when I said things like that, everybody thought I was nuts, conspiracy theorist. It’s not conspiracy theorist. It’s a – economists even have a term for it. It’s called regulatory capture.

 

The regulators, if you’re a tough, bare-knuckle regulator, there’s no job offers for you, but if you’re a good boy and you sit at the table nicely, you – and you don’t push too hard, you work six or seven years as a regulator, you can turn around and go and make a half a million dollars a year working for the people you were just supposed to be regulating. So, economists, starting in ’72 with George Stigler, started calling it regulatory capture, and it happened in every kind of regulator, but I think the SEC is particularly captured. I actually have some – I think that Mary Schapiro is an improvement, but the SEC is hopelessly captured. You know, the SEC – can I give you a little history story you can cut out as – if this is too long, you can edit it –

 

Aaron Brabham: You know what, this actually ties in perfectly with what we were talking about before we had you.

 

Patrick Byrne: Well, in 1933, there was a guy named Ferdinand Pecora, tough Sicilian immigrant – I love this story – who came to the U.S. I think he went to night school, got his law degree, became a lawyer, became a city prosecutor in New York in the ‘20s. Then, the crash of ’29 happens. Roosevelt comes in, and actually it was – the Senate said they were gonna investigate Wall Street, but it was really supposed to be a whitewash. They weren’t really planning on anything serious.

 

They made this guy the head of their investigative committee, this guy Pecora. Pecora never got the memo it was supposed to be a whitewash, and he put Wall Street under oath, and in fact, his biography was called I think Wall Street Under Oath or something, and he got J.P. Morgan under oath. And in ten days that shook the world back then, he got the big names on Wall Street in front of a Senate panel and grilled them, and all this stuff came out that became the basis of the ‘33 and ‘34 Security Act. It was Ferdinand Pecora. However, what Wall – what Roosevelt wanted to do was create an arm of the Department of Justice that would go after Wall Street, and Wall Street fought back with all their might.

 

In fact, Roosevelt later said, “Of all the reforms I tried to make on American society, the most hard-fought one was reforming Wall Street,” and Will Rogers said, as this was going on, something like, “Them Wall Street boys sure are fighting awful hard having a cop on the street corner.” Well, finally a compromise was reached between Wall Street and the Roosevelt Administration. The compromise was the SEC, that there would just be a civilian commission, no real crime-fighting ability, but a civilian commission that would survey Wall Street. And if they thought things – if they saw somebody doing something wrong, they would bring a civil lawsuit, and they had the power to make a criminal referral to the DOJ, but it would just be a civil commission. Well, that’s bad institutional design, because, first of all, it’s toothless.

 

Nobody on Wall Street is scared of it. The only thing that scares them is – are orange jumpsuits, and the only people who issue orange jumpsuits are the Department of Justice. In addition, it created this very soft target for Wall Street to go after, and they have very clearly, by certainly in the last decade, and I think probably over time before that, they have captured that target. The SEC is a captured regulator, and so we think – we as a society set up regulators to protect us from certain industries, but they get captured, and they start working for the industries against society.

 

I think the SEC is, you know, working for Wall Street against society, which sounded – again, in 2005, people thought I had UFOs coming out of my head to say that the SEC really is asleep at the switch and doesn’t have the interest of the U.S. at heart. But, it’s gone from being a far-out proposition to, I think, trivially true at this point. After 2008, does anyone believe in the SEC anymore?

 

Dan Ferris: Well, does anyone believe in regulation? I mean, listen, Patrick, I mean, isn’t this just human nature? Everybody thinks that, well, we have a problem, so we’re gonna build a regulatory agency, and that’s gonna protect us from the problem, but it never quite turns out that way. Isn’t this just sort of built into human relations? I mean, aren’t – isn’t it like you tell somebody they gotta wear their seatbelt, and so, oh, they wear their seatbelt.

 

And there are some studies that say it works, but the real truth is, they just drive faster because they think they’re protected, so they expose themselves to even more risk, in other words. So –

 

Patrick Byrne: That’s a good –

 

Dan Ferris: – don’t we just expose ourselves to more risk? Wouldn’t we be doing ourselves a favor if we got rid of the SEC and simply exposed ourselves to the full brunt of the risk and stop pretending that we have this God-given right to earn a return on – from stocks or something. It’s kind of silly, all of it, isn’t it?

 

Patrick Byrne: Well, that’s certainly the direction some countries took. Like Japan, they basically have a market that’s much more buyers-beware market. You just have to worry yourself about whether you’re buying from someone with insider trading knowledge or not. And yeah, one could argue that it’s like the scene in Jaws where they’re – where the town council is putting signs on the beach saying the beaches are safe when there’s a great white out there. You’d be better off not having them at all than having government saying, “The beaches are safe. You can go swimming,” when they’re really not. I don’t agree, though.

 

Normally I’m not a big fan of regulators in general. I’m a Milton Friedman guy, and I’m not a central planning guy. I’m a pro-freedom guy. However, I think that the financial industry is a special case, because there are – every financial business, by its nature, is a business of you give me some money today, and then in the future I’ll be here to give you money. Or your windshield cracks, your house burns down, your husband dies, all finance by – every financial business, by its nature, offers that kind of a proposition.

 

Well, that proposition is very attractive to crooks, and so there’s gonna be crooks try to get into the finance industry. I think if you didn’t have a regulator, what happened in 2008 would be happening every month. I think that what we should do, though, is fix the institutional design, and that is the SEC should be unplugged, and it should be recreated within the Department of Justice or the FBI or somebody like that, who I think are much less likely – it’s just much – they’re more like the military. They’re not guys who are looking for a job with Sullivan & Cromwell or Goldman Sachs. They’re guys who really care about the country, and I think that the SEC at a minimum the institutional design should be changed, and they should – it shouldn’t be a civil commission. They should be moved into a agency where people get to carry badges and guns.

 

Aaron Brabham: Let’s switch gears for a second, and if you don’t, look, we really appreciate your time. We’ll let you get out of here in a second, but there’s a couple of things I do wanna cover before we let you go that I think are real important. The first one is, if you wouldn’t mind, most of our listeners are familiar with Overstock, if not all of them, but I find fascinating your discovery and implementation of Worldstock. Would you mind kind of elaborating on that a little bit and explaining how you discovered it and how it benefits the artist?

 

Patrick Byrne: Yes. I consider it the best idea of my life. In 2001, I was motorcycling around Cambodia. Crashed, actually; broke my arm. But, anyway, I spent two weeks motorcycling around, and the – there’s a lot of landmine survivors in Cambodia, for obvious reasons, and they get retrained as potters and weavers and silversmiths and so forth. And they make these beautiful items, but those items don’t move into the mass retail system, because the mass retail system really isn’t set up – they want – when Wal-Mart buys something, they want 200,000 of it.

 

They don’t want 20 little brass bowls from a village in Cambodia, but we realized – or – that our supply chain, which is set up for liquidation and – which means very small lots, comparatively small lots, would work beautifully with artisans, so we started contacting artisans and artisan groups around the world. I have some women who built it, built the department. I always told them they had every woman’s dream job, travel and shop. They travel all over the world. They find co-ops, and these aren’t sympathy products.

 

These aren’t buy this little painted cross to support the cause of women in Afghanistan. These are beautiful products that you would find in a boutique in America if you found them at all, and they’d be about four times the price, or at least twice the price. We buy them, bring them in, sell them in Worldstock, which is a department within Overstock, at just enough markup to cover our expenses. We make no profit. The profits we have made we use to build schools.

 

We’ve built, excuse me, 26 schools around the world, but anyway, we have about 10,000 artisans now in 55 countries supplying Worldstock, and I’m really quite proud of it. They’re all over the world, and like a little – I went to Colombia a couple years ago and visited little woodworking co-ops, you know, six guys in a village in the middle of Colombia making wood benches and actually some – we have something called a Sioux lamp on our site, a beautiful – Sioux as in the Indian tribe, S-I-O-U-X, and – which is a best seller. And we have this in 55 countries, and it’s – actually, we’ve – I think we’ve sent about $80 million back to the suppliers. We sent – about 70 percent of the purchase price gets back to the suppliers.

 

Aaron Brabham: Yeah, that’s fantastic. One more thing, and look, we really appreciate your time, like I said. I would hate to cut you off because your bio is so fantastic, and you’ve got a lot of great things here. The last thing I’d like for – to leave our listeners with ‘cause – if Porter was here, we go on these rants all the time about how the public school systems these days are set up to basically send kids straight to jail, especially in the inner cities. I mean, it’s just a horrible system.

 

You’re the chairman of the Foundation for Educational Choice. It’s a nonprofit organization dedicated to school choice and educational reform, and it was set up by Milton Friedman, which you mentioned earlier. How did you get involved in that, and what do you see as the number one problem with public schools? I know you’re a big fan of the voucher system.

 

Patrick Byrne: Right, well Milton and Rose Friedman set up The Friedman Foundation For School Choice, and that’s actually the – in a rare lapse of judgment, rare lapse of judgment, he asked me to take over as chairman for him when he passed, and I did and co-chaired with Rose until she passed a few years later. And they thought that the single most important thing to do with their money and their estate and their name was to get school choice to Americans. School choice can mean a number of things. The first step is what they do in Oakland, backpack funding, where you can go to any public school you want and the money goes with you. Then, the next step is a little bit more choice, is charter schools.

 

Now, I like charter schools, too, but the big step, and the right step, is vouchers. Vouchers were the equivalent – is called tuition tax credits. You give people the money – right now this country is spending about $15,000.00 per student in public school, in government school as Milton would say, $15,000.00. Suppose you let anyone who wants to withdraw and just take a check for $8,000.00. First of all, the government saves $7,000.00, and I saw yesterday that there’s a big report on the state budget crisis.

 

Every state in America can solve its budget crisis tomorrow if they want to if they created a voucher system and about 20 or 25 percent of kids opted out and took it, we can solve the whole state financial crisis tomorrow. So, that’s one thing to know. In addition, you’ll get much better education. You take your voucher, your check for $8,000.00 from the government, or a tuition tax credit works the same way. You just – never even have to send it to them, and you go and you put it towards private school education.

 

Average private school in America is $7,000.00. There’s great private schools available, and in addition, the – I think the supply would rise to meet the demand. It’s – oh, the data is overwhelmingly conclusive at this point that it works, that you can very quickly close the achievement gap between African American students and non-African American students. It’s a strange issue. As Milton used to say, the Democrats, and I don’t wanna be too political, and I’m not a Republican, so I’m saying – I’m a libertarian, so I’m trying not to be too political, but he used to say the Democrats hold themselves out as the champion of the poor and the underprivileged, but on the single most important issue facing them now, education, they’re on the wrong side.

 

It’s a strange issue in that about 70 percent of Hispanic adults with school-age children and 67 percent of African Americans with school-age children support school choice vouchers. But, in general, the Democratic Party, because it is so closely tied to the NEA, the teachers union, it has been blocking school choice. Not to say that Republicans are all for it. Some suburban – well, some are; some aren’t. But, I think more are, and it addresses the basic problem.

 

The basic problem is education as an industry is organized from the top down, like the old Soviet agricultural model, and we have – behind that high school in your neighborhood, there is actually all these layers you never see. There’s the district, the county, the state and the federal layers, and now whenever you try to talk about changing, they trod out your local teachers to say, “Oh, don’t change anything.” But, what it really is is the guild behind the school – the district, the county, the state, the federal – which is absorbing so much money, and they don’t wanna see anything changed. And if you were talking to a Soviet apparatchik from 1975 and you were telling them, “Maybe you ought to change. You shouldn’t have folks in Moscow sending orders down to a farmer in Siberia about what he’s gonna plant,” they could tell you, “No, no, no – ”

 

They could tell you all their theories about how to reform the Soviet agricultural system. We’re gonna make – change this rule. We’re gonna change that rule. We’re gonna have a study, but they just couldn’t grasp that the problem doesn’t – you can’t fix it by changing the rules that get sent down from above. You change it by inverting the industry, organizing it from the bottom up, giving consumers a choice about what they buy, letting all the magic of the market and competition and people striving, entrepreneurs striving to deliver better and better products go to work.

 

But, in the American discourse for so – for many years, that simple to leap was too much for people to make, and all – so, all their talk about reforming education comes down to should we have this kinda curriculum or that, or this kinda testing or not testing, or teacher incentives, differential pay and getting rid of tenure, all of which – I’m agnostic about all that stuff. I don’t get involved in those debates. I think the system can’t be reformed. The Soviet system couldn’t be reformed until they broke the back of the Soviet agricultural planning agency, and our educational system isn’t gonna be reformed by a bunch of new directives from above. We have to give the consumers the choice, and the way you give the consumers the choice is you give the students that voucher for let’s say half of what the state’s spending anyway.

 

You give them the voucher and let them go and buy their own education, and they’ll get better education. The data is overwhelming that they get better education, which is why minorities are actually so pro-voucher, and incidentally, the state saved so much money that they can wipe out their entire fiscal crisis tomorrow, but with 20 or 25 percent of kids taking the deal, it’s enough to end the crisis. But, in California – I’ll close on this note – in California, they’re letting prisoners out of prison due to the budget crisis rather than let children have that deal and let 20 or 25 percent of kids take that deal. So, that tells you the priorities our society has.

 

Aaron Brabham: And for our listeners, where can I learn more about the Foundation for Educational Choice?

 

Patrick Byrne: Just Google “Friedman Foundation,” and the – actually, the official name has gotten – has reverted back to the Friedman Foundation, so just Google “Friedman Foundation,” and there’s a lot of papers and academic literature and ways you can contribute. If you’ve liked our interview today, I hope you’ll toss $20.00 – if there’s a simple way to contribute $20.00, I hope your listeners will consider putting some in.

 

Aaron Brabham: We will certainly put that up underneath your bio and have a link to it directly so that if our listeners wanna donate, they can feel free to do so. We certainly appreciate your time and fantastic conversation. Thanks for joining Stansberry Radio.

 

Patrick Byrne: Aaron and Dan, it’s been my honor. Call anytime.

 

Aaron Brabham: All right, thank you.

 

Patrick Byrne: Thank you.

 

Aaron Brabham: All right, Dan, National Scumbag Registry time. This week we’re adding more names to the National Scumbag Registry. Please keep sending us your nominees, especially if you have personal experience with a politician or other trusted figure. Let us know. You can e-mail us at feedback@stansberryradio.com or call our toll-free number, 855-727-2346.

 

I’ve got a nominee from a guy that had a little controversy, I don’t know, it was a couple years ago. Well, he surfaced again. Scumbags always seem to surface, these politicians. Nominating Anthony Weiner for the Scumbag Registry. Some people just don’t know when to shut it down.

 

The disgraced former congressman is sitting on $4.5 million campaign war chest, and he is seriously considering running for mayor. Now, of course, Anthony is known for Weinergate, where he tweeted inappropriate pictures to, allegedly, six different college-age women and then lied about it, but there was so much evidence against it. He said it was Photoshopped. I mean, this guy was kind of a disaster. His PR person really dropped the ball on this.

 

Ultimately, he came clean and stepped down from his congressional seat. Dan, look, I don’t get it. These guys are representatives of the United States, and he’s using social media sites to send inappropriate pictures to random girls he doesn’t even know that are following him. Where is the psychology behind this?

 

Dan Ferris: Well, you know, I mean, I don’t know if I have a huge problem with the sending of pictures unless he’s like married and the pictures were –

 

Aaron Brabham: He’s married.

 

Dan Ferris: Okay, so he’s married, so that makes him a scumbag, I guess.

 

Aaron Brabham: Yeah, that’s really the part, but my thing is like, what’s weird to me is this guy, he’s sending – so, these are his followers, but, I mean, you, know you can have 2,000 – you can follow 2,000 people, and – but, he’s never really contacted them, so I guess he thought that they were like – just because they’re attractive and following him, I guess he, in his mind, assumed that they wanted to sleep with him or something. I don’t know, it’s real bizarre what some of these people do, so…

 

Dan Ferris: It is, so this issue of having a $4.5 million campaign war chest is a little odd to me. It shows me how much I don’t know about campaign finance, because I can’t believe that there’s just $4.5 million sitting around, waiting for this guy to spend it.

 

Aaron Brabham: Yeah, that’s – so, I – yeah, that – when I read the story, I was, okay, what’s the motivation for this guy trying to get back in? So, apparently – and I don’t know that much about it either, Dan, but apparently there is a timeframe, as there should be, on your campaign war chest where you have to use it or – I don’t know if it gets recirculated to your party. I don’t really know what happens, but I guess he has a certain amount of time to use it. That’s why he’s considering getting back into politics, so he can just blow a bunch of donated money to try to win his position as a mayor.

 

Dan Ferris: It’s funny, because the guy we were supposed to have on today, Ed Feulner, has a chapter in his book called “Something for Nothing,” and it talks about people who are celebrities that don’t seem to really bear the full brunt of the consequences of their actions. And I feel like we had one here, because you probably should take away the $4.5 million from a guy like that.

 

Aaron Brabham: Yeah, especially if he resigns. I mean, come on, that’s –

 

Dan Ferris: Yeah.

 

Aaron Brabham: I mean, that’s totally absurd to me.

 

Dan Ferris: Yeah.

 

Aaron Brabham: All right, I got another nominee for you. Now, your economic views and your investing views and this guy’s are complete 180s, so we have Russell R. Wasendorf Sr., chairman and CEO of Peregrine Financial Group. After discovering accounting irregularities, regulators shut down PFGBEST, a prominent player in futures trading. Accounts with customer funds appear to be short more than $200 million. Before his arrest last Friday, Wasendorf tried to commit suicide. Regulators say that in February of 2010 an account that purported to have $218 million had actually just $10 million. He’s already confessed to embezzling from clients and defrauding banks for nearly two decades.

 

Dan Ferris: Two decades.

 

Aaron Brabham: Two decades, so you – so, on one hand, you have – you are promoting investing in the world’s safest, most dominant companies.

 

Dan Ferris: Yeah.

 

Aaron Brabham: This guy running a futures trading, which, to me, is the complete opposite, and I don’t know if it gets any more sketchy than futures trading, does it?

 

Dan Ferris: I think probably, you know, Forex, so-called Forex.

 

Aaron Brabham: Yeah, Forex is tough.

 

Dan Ferris: When you see Forex on the Internet, run like hell.

 

Aaron Brabham: Yeah. By the way, they are the best stories to sell, because it’s international currencies, and I believe they’re traded 24 hours a day, so you could –

 

Dan Ferris: Oh, yeah.

 

Aaron Brabham: – lose all your money in a 24-hour period of time, no problem.

 

Dan Ferris: Yeah, it’s horrible, but this story is interesting to me, because this guy got away with it for 20 years, and it’s just another piece of evidence to show me that we do not need all these regulators. They’re not doing us any good. They’re not saving us from ourselves. They’re not saving us from fraudsters and anything else. I mean, when you can have guys like this or really – you know, of course, Bernie Madoff is the poster child for this thing. If you can have somebody doing that and then, in Madoff’s case, have them delivered to the SEC multiple times and have the SEC balk and not do anything about it, you know that these people are truly, truly worthless.

 

And I think – I seem to remember on the show when I was a guest Porter talking about how these people and the regulators want jobs in the financial industry, so how bad – what are you gonna do, throw your future employer in jail or something? Just the whole idea is false, and it reminds me of a guy, an insurance guy who once told me, he said, “Dan, I can stop all the traffic accidents tomorrow. Just take out all the seatbelts and put a – like a 12-inch steel spike out of the steering wheel pointing at the drivers heart, and I promise you there will be not so much as a fender bender ever again.” And the point was, when the risk is in your face and you can’t avoid it and no one is – no regulator is coming between you and the risk, your incentive to avoid it goes way, way up, and when you put a – when you allege to put a regulator between yourself and the risk, you know, risk of fraud or whatever it is, you’re actually not doing the consumer a good turn, because you’re exposing him to it.

 

You’re giving him a false sense of security. These people had a false sense of security for 2 decades, for 20 years to have –

 

Aaron Brabham: Twenty years is a long time to be running a racket.

 

Dan Ferris: I know. It’s unfathomable that anybody thinks that you can be protected from this stuff by doing anything but asking a lot of questions and making good decisions and not giving your money to shady crooks like Madoff and this guy Wasendorf. I promise you, if you and I were sitting in front of this guy at some point in the last 20 years and we would have asked him a few pointed questions, we would have walked out of there and gone, “No way.”

 

Aaron Brabham: Yeah, absolutely. Look, if – listeners, if you guys don’t believe what Dan is saying, just set your DVR to record American Greed. They show them all the time, and it’s amazing at how dumb these schemes are that these people run, and they’re so blatantly obvious. It’s a scheme guaranteeing 14 percent returns a month on import/export businesses, and just it’s so insane. If it sounds too good to be true, it certainly is.

 

Dan Ferris: And you know, Aaron, it’s – there’s a psychological thing that goes on here, and I think it was Microsoft did a study – you might have been the one who told me about this in an e-mail. Microsoft did this study where they were trying to figure out why all these Internet scams are out of Ethiopia and why the text that you get when you get one of these scams that’s phishing for your financial information is so garbled and poorly written. And the reason is very clever. They wanna disqualify anybody who’s smart enough to, you know, catch on at some point.

 

Aaron Brabham: To ask a question. They do a good job of qualifying dumb people.

 

Dan Ferris: Right. So, making people responsible and not protecting them will make them, I think, a lot more cautious, and there will still be a lot of people like this out there, but thinking that you can protect us with regulators who sit in cushy jobs and don’t really do anything while these guys get away with murder is kind of – it’s naïve. It’s incredibly naïve.

 

Aaron Brabham: All right, we have a few “you just can’t make this stuff up.” Dan, this sounds right up your alley. I mean, you live in Oregon. You’re so far removed from big city life, but I have a feeling you’re gonna love this. Silicon Valley is finally getting its own Bravo reality show.

 

This isn’t about housewives or fat people, but the tech world isn’t quite ready for the public exposure, so they’re doing a reality show based on young entrepreneurs, ‘cause there’s – in California you’ve got the Instagram, right. You’ve got these young guys out there. Facebook has set the precedents and all these businesses that are kind of offshoots. It’s kind of like dotcom 2.0 except it’s gonna be the reality show about these young hotshots partying and going crazy. But, there are some people in California that are like, “Ooh, this is not gonna be good for our industry.”

 

Personally, I don’t really see any problem with it, and I think it’ll be mildly entertaining, but I doubt you’ll watch one episode, Dan.

 

Dan Ferris: Actually, Aaron, you – I’m going to be there with pen and paper in my hand, taking down names of individuals and names of companies looking for a good short sale after this –

 

Aaron Brabham: That’s a great idea. I like that a lot.

 

Dan Ferris: – because – yeah. I mean, look, would Steve Jobs let these idiots follow him around with a camera and a microphone?

 

Aaron Brabham: Absolutely not.

 

Dan Ferris: No. Would you take anyone seriously who said, “I am a tech entrepreneur in Silicon Valley, and I’m gonna make a ton of money. Oh, and by the way, I have a reality TV series.”

 

Aaron Brabham: It’s garbage.

 

Dan Ferris: It’s ridiculous.

 

Aaron Brabham: It’s absolute garbage.

 

Dan Ferris: I’m looking forward to this – to the short selling.

 

Aaron Brabham: Speaking of venture capitalists, this is a – kind of a side note, but I have a Netflix account, and I’m watching a documentary Something Ventured. Dan, if you haven’t seen this, I think you’ll love it. It basically gives the story of the venture capitalists that were behind Intel, Tandem Computers, Atari, Genentech and a few others, and it shows how these guys literally – it talks about how some of them passed up these opportunities – it also has Apple, too – and how other guys stuck with it, but put all their money into it. It was a total roll of the dice, and, obviously, these guys turned out to be huge winners, but it’s a fantastic documentary I think you’ll enjoy.

 

Dan Ferris: Yeah, those are great stories.

 

Aaron Brabham: All right, the last one, I know you’ve seen this. President Obama addressed supporters in Virginia last Friday and took a shot at the small business community owner. Quote, “If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create the unbelievable American system that we have that allowed you to thrive.

 

“Somebody invested in roads and bridges. If you’ve got a business, you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.”

 

Look, I know that you’ve had mentors in your life, Dan, but this, to me, is the most absurd statement ever, ‘cause he – what he totally discounts or just doesn’t acknowledge at all is you putting your own capital and your own time and energy into ventures. And by the way, most ventures fail. He just kinda acts like the government just kinda picks you up and carries you to freedom, and, therefore, you should give most of your money back to the people.

 

Dan Ferris: Yeah, it’s a typical sort of academic government viewpoint of wealth where it’s this found – it’s all found wealth to these people, and it’s magic, and it was just there and it happened. Somebody invested in roads and bridges. Somebody did this. Somebody else made this happen. Well, of course, in his mind, somebody else made everything happen, you know, because he doesn’t make anything happen that’s productive or creative or good. So, of course, he thinks this way. Of course, he thinks everybody else did it, because everybody else did do everything valuable except for him.

 

Aaron Brabham: It reminds me of that piece that Porter wrote, and I’ll see if I can get a hold of it and put it up on the Stansberry Radio website, about he has a business offer to become his partner, and he takes the viewpoint of he’s the government and essentially you put up all the risk, all the capital. You pay him enormous amounts of fees for regulations, licensing, taxes, and then, when you die, you give 50 percent of it away, too, so basically you ultimately end up keeping 25 percent of all the hard work that you did.

 

Dan Ferris: Yeah, that was really a great piece. We can send that around once a month or something. It’s really an excellent way to – and a highly readable – it’s a very enjoyable read, too, so…

 

Aaron Brabham: It is. I love when Porter goes on these rants like that. They usually become kind of like little viral pieces for people.

 

Dan Ferris: Yeah, that one did go – get quite viral, I remember.

 

Aaron Brabham: All right, I’ve got a few voicemails. Tim, fire up the voicemails.

 

Voicemail: Hello, Aaron and Porter. I listen to your show all the time and love it. I don’t know if you’ve ever considered doing a show on the effects of who would win the election. I talk to many businessmen around here, and most of them do say that because of government regulation, et cetera, et cetera, they won’t be expanding. They’re just waiting it out.

 

If you could do a show on what you think the – where it’s best to park our money maybe, if you’re – we’re not sure about which way the election’s gonna go, or if we think Obama is gonna win what we should invest in. If we think Romney’s gonna win, what would be a good investment? Keep up the good work.

 

Aaron Brabham: I can’t speak for Porter on this, but since I have Dan as my cohost, Dan, this sounds right up your alley as to who cares who wins. What would you do?

 

Dan Ferris: Yeah, I mean, I do say who cares who wins? I think by the time we get down to the final two candidates, it’s usually not much of a choice, and I think this is – it’s the same as it generally is. And I don’t think it matters who the president is, really. There are some traders who do historical research, and they say – oh, I think it’s like the third or fourth year of a presidency is it’s generally bullish for stocks or something like that. I don’t know exactly what the finding is, but I know some people do that kinda research.

 

Other than that, sort of like Buffett always says, if Tim Geithner and Ben Bernanke could whisper in his ear and tell him everything that they were about to do, it wouldn’t change anything. And if I had a crystal ball that told me who the president was gonna be come November, I wouldn’t do anything different either. I don’t think it matters.

 

Aaron Brabham: All right, we got a couple pieces of e-mail and a couple of tweets, and then we’ll wrap up the show. Alan had this to say about Obamacare. “The latest poll was tied at I believe it was 43 percent for and 43 percent against. I believe that after 2014 when Obamacare is fully in place you will find that the average Joe will like it. Obamacare is similar to the healthcare package in Switzerland, and it worked very well there. The book The Healing of America by T. R. Reid is very informative.” Look, I don’t even know if this thing’s gonna make it that far, but if it does, I just know it’s gonna cost taxpayers a lot of money.

 

Dan Ferris: Yeah. How can you add more of anything but technology and highly skilled personnel and get a lower cost? I don’t understand it. I don’t understand how forcing people to buy something they can’t afford or don’t need – I mean, I don’t understand how that could possibly raise anyone’s standard of living, and it certainly – I don’t see how this could possibly be good for the quality of medical care in general. I don’t understand it at all, but I’ll tell you something, I do believe that – this guy says once it’s in place, the average Joe will like it. Well, of course. The average Joe votes himself a share of the treasury and –

 

Aaron Brabham: That’s right.

 

Dan Ferris: – you know, at every turn, so yeah, of course, they’ll love it. And this poll that was tied at 43 for and against, I don’t know who they were polling, but I think most people are for it ‘cause they think they’re getting something for nothing, which is a huge problem. That’s what that chapter in Feulner’s book that I was talking about earlier.

 

Aaron Brabham: Mm-hmm. All right, we have Phil. He asked this question about valuation. “I love this show and really appreciate your comments and insights. I wanted to study your comments on valuing the market cap versus its enterprise value. Do you know of any books or sources where I could learn more about this?” You have a couple of recommendations?

 

Dan Ferris: Enterprise value versus market cap. You know, I’ve never seen a lengthy discussion of this, so –

 

Aaron Brabham: Right, ‘cause market cap is the share price times the number of outstanding shares, and then the enterprise value takes into account the debt.

 

Dan Ferris: Right, so enterprise value, you add the market cap plus the debt and you subtract the cash, so this is sort of like taking out the value of any net cash and valuing just the business, so when you get a stock like Microsoft, they got a lot of cash, so the market cap might be $250 million, but they got so much cash that the enterprise value is $200 million, and that’s the real value that the market is placing on the business. Conversely, if you – if they had a whole bunch of debt, you know, companies with a whole bunch of debt, the enterprise value is gonna be higher than the market cap, so you could say, “Well, that’s what the market is really valuing the business.” But, some businesses tolerate large amounts of debt really well, so I don’t know, this is a much more technical academic kind of question than I think he realizes.

 

And I certainly don’t know of any long-term charts of the S&P 500 overlaid with its enterprise value and market cap. I know that corporations are holding a huge amount of cash these days, huge amounts of cash, but they generally have a little more debt, too, so –

 

Aaron Brabham: I do have a side question for you, Dan, about the huge amounts of cash, ‘cause that’s true. It’s over a trillion dollars, a couple of trillion dollars, something ridiculous like that, and a lot of it’s overseas. And the reason it’s overseas is because if they brought it back into the United States, they would get taxed on it.

 

Dan Ferris: Right.

 

Aaron Brabham: What do you think or do you even have a plan or if you were a politician, would you do some type of like – you have till the end of this year and we’ll just charge you five percent or ten percent to get that capital back in the United States and, hopefully, put it to work here? I mean, do you think it would do businesses good or the United States economy good if we could bring some of that money back over?

 

Dan Ferris: Well, you, know it would certainly do the shareholders of those companies a heck of a lot of good. If you did something like that, the share prices of Cisco and Microsoft and all these tech companies with huge wads of cash overseas – I think Microsoft has like 90 percent of its cash overseas – they’d skyrocket that day, because the company would probably, in Microsoft’s case, I think they would probably use a whole lot of it to buy back shares or maybe pay a special dividend or something like that. And I think other companies would follow suit. It’s kind of a frozen value that’s just sitting out there, waiting to be deployed in a better political environment.

 

Aaron Brabham: Sounds to me like it would be good for the market and good for the investor, obviously, and great for the economy, because, obviously, when the wealth goes up, there’s more spending. Sounds like a no-brainer to me, but don’t worry, the government doesn’t make sound decisions, as we know, especially when it comes to taxes.

 

Dan Ferris: Right.

 

Aaron Brabham: All right, we have one tweet. Superman_Coach tweeted us. “Just made at Stansberry Radio my 2,000th follow on the Fourth of July. Not a bad way to celebrate financial independence.” And as I mentioned earlier, for those of you who don’t know, you can only follow 2,000 people on Twitter, so we’re honored that you saved the best for last, Superman underscore Coach.

 

Well, that’s our show for today. Next week, we have our guest, John Rocker. John is a former major league baseball pitcher and now a successful real estate developer and columnist. We appreciate you listening to us on Stansberry Radio. Special thanks to Dan Ferris for joining us and sitting in the hot seat. I appreciate all your insights and all the great, valuable advice you’ve given to our listeners, Dan.

 

Dan Ferris: Oh, it’s my pleasure, Aaron. Any time you need me, I’m here.

 

Aaron Brabham: And follow us on Twitter at Stansberry Radio. Like us on facebook.com, Stansberry Radio, and subscribe to our YouTube that’s StansberryMedia. Don’t forget, if you ever need to talk, you can always talk to our voicemail, 1-855-SARadio. [Music playing] I hope you’ve enjoyed the show, and if you learned something, please tell your friends about it. We’ll see you next week.

 

Stansberry Radio is a purely public broadcast and is not intended to be personalized financial advice for any individual specific situation. Each individual’s financial situation is unique, and Stansberry Radio should not be relied upon and/or considered as personalized advice. Stansberry Radio is not licensed to render personalized advice and should be considered simply the public opinions of Stansberry Radio and its guests. Recommendations on specific financial securities are not intended to address any listener’s particular financial situation.

 

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