Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Costa Mesa, California. 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 thought possible.
Jason is a genuine self-made multimillionaire, 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.
Jason Hartman: Welcome to another edition of Creating Wealth. This is your host, Jason Hartman, and this is Show No. 85. Glad you’re with us today. I hope you enjoyed the last show with G. Edward Griffin, who is the highly esteemed author of The Creature from Jekyll Island, which is really considered the masterwork on the monetary system we have. Frankly, it’s largely just a big shell game and it’s a big scam, but he exposed a lot of it. So if you didn’t hear that interview, make sure you listen. He was a really good guest.
Okay, so I’d like to take a different tact today. We’re going to talk to a guru in the stock market. Yes, I know what you’re thinking, you regular listeners. You’re thinking, you know, you’ve listened to a lot of the shows. Maybe you’ve listened to all of the shows. Maybe like many of our listeners, you’ve listened to all of the shows two or three times, and we sure appreciate you listening. And you may think, wow; why would Jason have a stock market guy on his show?
Well, I’ve kind of gone this route a couple of times before, as you may know, and with this one, I really like this guy’s work and I think he’s pretty interesting. I still think far and away income properties are a much better investment, but I know that you’re probably not going to take my advice and put all of your money into income properties and rental properties.
So I want to kind of keep you apprised of what’s going on, on Wall Street, with all of the various things out there, and I think Chris Mayer, our next guest, has some pretty decent advice. So listen in to this interview. I’ll just tell you a little bit about him. He’s a former corporate banking guru, turned financial author, and he’s known as one of the nation’s premier, up-and-coming investment advisors. For you regular listeners, as I mentioned, you know I’m not fond of the stock market and this probably didn’t change my point of view, but it is a great interview nonetheless, and Chris has a new book coming out, which looks to be very interesting as well. He’ll provide the information about that in the interview.
He publishes two great newsletters. He’s a frequent guest on Fox News and CNBC and he’s really got some respected publications. I think you’ll enjoy this interview and learn a lot from it. So let’s listen in. Again, we have a lot of shows coming up that have already been recorded. We’re going to try to release a show to you, a couple or maybe even three shows per week here for the next several weeks. Clear out your calendars, make time for us, and we’ve got a lot of good content coming up.
Before we go to the interview with Chris Mayer, let’s listen in for just a few quick minutes about one of our clients and his experience purchasing an apartment building. This will be quite interesting. And then we’ll go to the interview with Chris.
Jason Hartman: Well, John, it’s my pleasure to welcome you to the show. Thanks for being here.
John: Thank you very much for having me, Jason.
Jason Hartman: So tell us a little bit of your background and how you found out about us real quickly, and then let’s talk about your investments.
John: Well, believe it or not, I live up in snowy Northern Minnesota, and actually, you could call it right now Minne-snow-ta. There’s probably about 20 inches of snow on the ground right now.
Jason Hartman: Wow! Yeah, so much for global warming, huh? The whole world seems to be freezing.
John: Yeah, for sure it’s a little bit too fast, too early even for our taste.
Jason Hartman: That’s for sure. Well, tell us a little bit just quickly, and by the way, I so much appreciate having you on the show and sharing your experience from a real live client. It’s always great to do this. We do it occasionally. So you had found us on iTunes. You started listening to the podcast.
John: Yes, I did and I also got the free CD, and for people listening, I highly recommend it. It will give you everything that you need to learn and understand what you teach about very shortly, instead of going back and going through about maybe 14 or 15 podcasts. It is very time-specific. The information is easy to understand, so go ahead, and get the free CD. I did that.
I also went back and I listened to the old podcasts as you recommended and very good. The older stuff, learn a little bit about what you teach, what you’re talking about, and the thing about is, Jason, you make sense, good common sense. When I first started listening to you, I thought nobody understood real estate like I did and I thought here’s somebody who’s talking about real estate. He lives a long ways from my home – in California; I live in Minnesota – and we’re thinking on the same level. Unbelievable! What is this? You got me hooked.
Jason Hartman: Well, good. I’m glad we did. And by the way, for anybody listening, you can request that free CD. Just go to www.jasonhartman.com and you can get your own copy. Our team here will either mail you a physical copy or you get a download link so you can just download it and listen to it on your iPod or whatever is convenient.
Had you invested in real estate prior to coming to Platinum Properties Investor Network?
John: I had one time in my own area. I also own a rental unit about 50 miles away from my home. It’s a little bit difficult for travel and I do landlord it myself. Sometimes it can be difficult, but I’m taking it as a learning experience. Otherwise, majority, I will do most of my investing through Platinum. Jason, you’ve got a great team. Karam, Gia, thank you so much. I highly recommend both of these people to everyone. They will walk you through the process. It doesn’t matter if you’ve invested in real estate before. Be scared.
I’m calling you on the phone. I’m talking to you half a country away. They’ll hold your hand through the whole thing and if you got a question, well, my own philosophy is there’s never a stupid question. There’s only a stupid answer. I had a few silly questions and I thought, oh, yeah, that is right, and Karam and Gia were very good, very courteous, very prompt in answering either voicemail or email all the time.
Jason Hartman: Excellent. Well, tell us about – I guess you purchased one apartment through our network so far and that one’s in Columbus, Ohio, and then you’re closing on another apartment in Columbus in January, I believe, right?
John: That is correct. I flew out to Columbus, Ohio, met the team on the ground there, got to know the city, which I have never been to before. I found Columbus to be a beautiful community. I was very impressed with it and, like I said, I flew out there. It was June, beautiful weather. I caught a couple nice days. The apartment buildings, very nice. These are brand new; they’re clean. I would like to live in them. They’re very nice and the people in Columbus, not just the people with the realtor and the companies involved, but I’m going to talk about the people in Columbus. Very nice, good location. This is a community that is booming.
I kind of recognized the signs. You’ve got a good school system there. The Ohio State University, the home of the Buckeyes, is there. The federal government buildings are there in Ohio. Like I said, I’ve never been to Columbus – good community. Good people there. It’s a good place to invest.
Jason Hartman: And let me just mention something about that, John, if I could just interject here. Ohio is pretty much a depressing story. I’d say Michigan is worse than Ohio, but there are, in these areas, the old saying like, of course, as you know as a listener, that all real estate is local. And so Columbus is one of the bright spots in the Rust Belt, which, overall, isn’t doing too well. Obviously, the automakers are in the news and everything like that. But Columbus has been a really good market for us and we’re pleasantly surprised.
John: I asked the people with the ground team in Columbus what are the tenants. What kind of makeup are we seeing here? Are we seeing students? What are we seeing here? Are we seeing people who have foreclosed on their homes? What is it? I was told it’s all across the board. These are people who are getting a fresh start. You’ve got new couples. You have college students. You have people who have industry jobs. It is a white-collar town. They do say that, but it’s so broad based of white collar and there’s blue collar as well. It’s a good place because you see such a mixture and also, there’s a lot of building going on there. There’s a lot of building going on there, roads, industry, and buildings as well for dwelling.
Jason Hartman: Tell us a little bit about the property you’ve purchased. I mean brand new apartment buildings, good financing, already rented. Tell us a little bit about that whole experience.
John: That is something that I was not expecting. This is a building that’s already full. The people are already there. You’re not buying an empty lot and waiting for the building to come up. You’re not buying an empty building and waiting for the tenants to come. Everything is right there waiting for you. So what are you waiting for? Pull the trigger. Pull the trigger. It will be the best thing you have ever done. Get the good financing. Twenty percent down is what the banks are doing and let’s talk about the economic crisis. I did this financing through this country’s economic crisis. I had to have the bank call me up and say whoa, whoa, wait a minute. We gotta slow down here. They got tentative on me. I was ready to go.
But pull the trigger. Be the investor. This is a great place to make some money. You’re going to buy a great property, brand new buildings, beautiful two-bedroom, one-bedroom apartments. They’re clean. This is a good neighborhood with the conveniences of home, with a grocery, the box stores, the Wal-Mart, K-Mart, and Target, all that. It’s all right there, right close off of a highway, convenient to get on and off to go commute wherever you have to go if you work in that city. This is a good location. These people in Columbus have done their planning extremely well. My hat is off to them.
Jason Hartman: Yeah, one of the things that makes it so unique in terms of this opportunity, and of course, we have other varied opportunities all around the country, but brand new apartments. First of all, that’s very hard to find, brand spanking new apartment units, and when you do, typically, first of all, you pay a gigantic premium and these aren’t that expensive. They’re a pretty good price. And then also, when you buy brand new, they’re not occupied, and what this developer has done as part of our deal with them is they have agreed that they will be 100 percent occupied before closing the deal. So our client gets a brand new unit, where the tenants have just recently moved in, and they’ve got 100 percent occupancy. So a really unique opportunity there. Any thoughts on that, John?
John: When I heard that, when I first walked in the door, I thought okay, I’m going to buy a building. I’m going to wait maybe a month, two months, and then I’m going to have some tenants. Oh, no, no, no, they said. The building’s already full. I just about had to pick my teeth up off the floor. I could not – what? The people are already in there? Really?
Jason Hartman: That’s fantastic.
John: Where do I sign?
Jason Hartman: Yeah, there you go. Hey, so tell us what your thoughts are about you had mentioned to me before we were recording about you were a big fan of Robert Kiyosaki and you were trying to find resources as to how to invest. You had listened to some other podcasts and so forth. Do you want to just touch on that briefly?
John: In 2002, I started reading Rich Dad, Poor Dad. I highly recommend Robert Kiyosaki’s educational system. But I’m going to say it right now. Jason Hartman also is doing the same type of education. Robert’s stuff is good. He’s gotten criticized by the critics who don’t know what they’re talking about. I suggest listen to Jason’s stuff. Get on the right track and get with Platinum and call them. What I have done is I have gone through iTunes. I have listened to real estate podcasts. I’d listened on audio book to Robert Kiyosaki’s stuff. Three books I had listened to and I wasn’t finding anything that was going to get me there.
All of a sudden, I’m going through some other real estate podcasts. Yeah, they’re all talking the same stuff and you know what? They’re all referring to Robert Kiyosaki, but then all of a sudden, I found another educational outlet that also had a website to go to and said there’s some properties here for you to look at. Go to www.jasonhartman.com. Okay, I’m going to do it. I’m game.
I took a look at it, clicked on the Properties. I took a look at the website, went through it very carefully, listened to some of the videos, listened to some of the testimonials. Oh, yeah, that’s all fine and good. Well, maybe I’ll give them a call. Got the free CD. It was not even a day and a half later, I got a call from Gia on the phone and she gave me a short interview, very pleasant, good conversation, and of course, everybody’s always a little bit skeptical. Yeah, okay, what’s the gimmick? What’s the show?
No, no show. This is the real thing. Jason always says on his podcasts – and I’m sorry; I’m going to repeat it – we practice what we preach, and Jason, you do practice what you preach. You do.
Jason Hartman: I tell you that is so true. I have sat across the table from people telling me to invest in this and that, and they’re usually these Wall Street guys with slick suits, and went to great schools, and they’re making all the money basically separating me and millions of other investors from their money. They’re not following their own plan. I mean, I love investing in income properties, and I just thought why can’t there be a place where not only you get the education you need to do it, but you get the help you need to do it so you can actually execute because the world is full, as the famous quote goes, the world is full of educated derelicts. How about a source that can really help you execute on the plan once you learn how to do it? And that’s our mission here at Platinum Properties Investor Network, so I’m glad that you feel we’ve provided that service for you, and of course we’ll continue to.
John, what’s your next move? You’ve got another apartment building closing in January. What’s next for you?
John: I’ll probably have to sit back just a little bit and watch that income come in, keep a close eye on it. By the way, it’s also professionally managed. I’m not going to have to worry about a call from Columbus, Ohio, to my little town in Northern Minnesota at 12:00 a.m. For me to move on, right now, I’m kind of stretched. That was a big step and right now, I’ve got some other things personally going in my life. I’m going to take charge of those as well. But I’m not going to stop using money as leverage.
Folks, get a financial education. I took action. I found somebody who also educated, but also is honest and provides you with the help. Everybody is going to be scared some time in their life. Good. That’s good to have that fear. But you know what? You need somebody to hold your hand along the way. Platinum Properties Investor Network is going to hold your hand. So what are you waiting for? Go ahead. Give them a call and do it.
Jason Hartman: Well, that’s fantastic. John, thanks so much for coming on the show with us today and we really appreciate, of course, your business and your faith in us, and we will, of course, do our very best to make sure that faith is totally justified for many, many years to come. So thank you very much.
John: It’s been a privilege to talk to you and thank you so much.
Jason Hartman: And let’s listen into the interview with Chris Mayer. Here it goes.
Chris Mayer Interview
Jason Hartman: It’s my pleasure to welcome Chris Mayer to the show. Chris is a corporate banking guru, turned financial author. He is considered one of the nation’s premier, up-and-coming investment advisors. He’s currently the editor of two financial advisory newsletters. I read them both. One is Capital in Crisis and the other one is Mayer’s Special Situations. He’s also the author of a book called Invest like a Dealmaker. Chris, it’s great to have you on.
Chris Mayer: Thanks for having me on. Good to be here.
Jason Hartman: Good. Well, you have some pretty interesting per formas here as an advisor. You focus on companies with real tangible assets and resources and commodities and so forth. Tell us a little bit about your investment philosophy.
Chris Mayer: Yeah, that’s it in a nutshell. The basic idea, there’s an acronym I like to use, CODE, and it sort of encapsulates basically what I’m looking for. C is for Cheap. I’m looking for cheap value oriented in stocks. The O is for Owner/Operators. We always prefer the people running the show to be in those investments with us. D is for Disclosure, which is just that we should be able to understand the business and they should make pretty good public disclosures. And E is for Excellent Financial Condition, which is particularly important now, so we’re not likely to bet on something that has a lot of debt.
And then sort of the umbrella over all of that is a preference for tangible assets from real stuff, so that would be whether it was water rights in the ground or oil or gas or timberland. We prefer things that are physical and tangible versus something that’s paper or based on something like a brand name, that’s a little more long lasting. So that’s basically the idea.
Jason Hartman: Yeah, I think that’s a good philosophy. I think the whole world, hopefully, by now, has gotten their taste of financial schemes and paper assets and fiat stock, fiat money, and they’re really looking for something real. And one of my philosophies as an investor is I just know there are three basic needs common to every human being on Earth, and it’s food, clothing, and shelter. As you see this rising middle class outside of the United States – and I’m saying that even in light of a major global slowdown that is occurring right now – the thing that history teaches us I think is that you can’t stop consumption when you keep increasing the population. And we know the population is increasing dramatically both in the U.S. and outside of the U.S.
So I agree with you. I like the commodities and the resources and so forth, so that sounds like good advice to me.
Chris Mayer: And that’s a good point you made, too. I mean we have to remember that even though we’re in the middle of a global contraction, there is still some baseline consumption for basic essential items, such as food and water and energy. And so, in the overall economy, there is sort of a built-in increase in that mainly through population, population and then also the fact that certain economies, big ones, such as China and India, have sort of joined the global game here and they’re not going to go back to closed economies that they were. There’s certainly a lot to push the demand for basic stuff, commodities, for years to come.
Jason Hartman: Yeah, I agree with you. Well, tell us a little bit more. What interested me about this first chapter of your book that you sent me, I love the title and we’ve done some advertising with a similar title before, A Tale of Two Markets. Tell us a little bit about that chapter and maybe the book in general.
Chris Mayer: The Tale of Two Markets, that chapter, is basically the core message of the book, and I just tried to get investors to think about more than just the price that you see going across your screen or the price that you see for your stocks in the newspaper the next day, that behind these symbols there are real businesses and real assets and they have value independent of the stock market. And that can be hard for some people to understand, but it’s easy if you think in terms of mergers and acquisitions. There are always transactions going on for businesses, for pieces of businesses, and you can compare that to what the price is in the stock market and then simply buy the cheaper assets.
The only examples I use really on the book have to do with hotels. You can look and see there are transactions all the time between knowledgeable buyers and sellers for hotels and you can sort of back in and see what they’re paying per room. And then you look at a publicly traded hotel company, for example, and you can see the value implied per room that the stock market has, and sometimes you get really wide gaps and you maybe have an attractive opportunity in the stock market if the stock market is the cheaper option of the two.
The book really just lays out a basic framework, different questions to ask, and how to think about some of these ideas, and then as you go through the book, there are other steps and I share some sources for ideas, and then a lot of anecdotes. I try hard to make it interesting by looking at what a lot of great investors have done over the last 100 years or so.
Jason Hartman: Let’s talk a little bit about that intrinsic value sort of issue that you just alluded to. You had mentioned a company and I do not recall the name of it, but I was reading your newsletter about a company in Canada where the value of its holdings exceeded the market capitalization, saying if you bought 100 percent of the stock, you would basically be buying the company for far less than it’s worth. You recall that one?
Chris Mayer: Yeah, that was Altius Minerals.
Jason Hartman: Right, that’s what it was.
Chris Mayer: Altius Minerals had a really healthy cash balance of $186 million or something like that and the market had valued it at about $150 million for the whole company. Even though this company was a company that’s profitable and spinning off cash and has a lot of other assets in the mix, you could get it for less than the cash it had on its books.
Jason Hartman: I’m not much of a fan of the stock market, but I do like your approach. I would say if you’re going to be in it, your approach is pretty appealing to me because it’s based, again, a lot less on the fiat type of stuff, and you leave yourself susceptible to some graft of owners and so forth, but in your approach, less so, much less so than we saw in the greater Wall Street sort of world, for sure.
But I remember I called up Charles Schwab. I have an account with them. I talked to their international division and I said what do you think of this? They said there’s just so little information about this company that we couldn’t recommend it. How did that do? I was curious about that and that story really intrigued me.
Chris Mayer: Yeah, that stock so far has done all right. It’s held its ground and it’s trading pretty close to that cash value. It’s recovered a little bit. Shortly after I wrote that comment, the stock rose 30 percent or so. But it’s still hanging in there. And the comment by the Charles Schwab advisor doesn’t really surprise me because there’s a lot of stocks out there that are too small for them to really pay much attention to, especially in the resource world. I still think that there’s an inherent bias against a lot of the commodity companies, and so there are many, many small, little oil and gas E&P’s, companies in different phases of mineral exploration and production that have very little coverage or no coverage at all on Wall Street, and so they’re not going to get much play in any kind of broker.
And the letter that I talk about Altius is called Mayer’s Special Situations and that’s part of the idea behind the letter, too, is that we want to ferret out these things where you don’t have any Wall Street coverage, and sometimes, right away, most people will think these must be tiny fly-by-night companies. They have no coverage. But I’ve found companies that have $900 million in sales that have no Wall Street coverage. It’s not that kind of bias necessarily.
Jason Hartman: Chris, it’s interesting that you say that because I had just listened to an interview about a week ago with Jim Rogers, who I’m a fan of, and he was really saying the same thing when it comes to the commodities world in general. He talked about how the major media, like Fortune Magazine, for example, they have no reporter covering commodities. Yet they have lots of resources, or all their resources I should say, really dedicated toward covering Wall Street’s overly complex, deceiving financial products. Well, why is that? Why does that bias exist in the financial press?
Chris Mayer: Well, I would say that there’s a couple reasons. One is that we’ve been through a period, the last bull market notwithstanding, which depending on how you date it, the commodity bull market either started in ’98 or 2002 or somewhere around in there, but for a long period of time, commodities didn’t do anything, but go down or just stayed flat. I mean it’s been decades since commodities have had any real appeal. And I don’t think that the market ever came fully around to embracing them, which even when you look at the highs some of these stocks achieved in 2008, what was so surprising is that, for example, a lot of the oil and gas E&P companies never really got multiples that you would see from companies that became favorites.
So if you looked at the 2000 bubble, you saw companies at 50 times earnings and so forth, but commodities companies never really got much of a multiple, even during the heyday. They were maybe eight; they were nine, ten times. A lot of commodities companies were trading at those multiples.
There is an inherent bias and part of it is that just sort of generationally, we haven’t had much of a commodity bull market. But maybe another part of it is, too, that I go to a lot of conferences and talk to a lot of other investors, and there’s always been a bias against commodity companies because people think they have to be able to predict what the commodity prices are going to do before you invest in commodity companies. And since nobody can predict that, then people want to say that they’re bad businesses or they’re very speculative. So these are the reasons I think you have some of that kind of bias.
Jason Hartman: Hey, I’m going to put you on the spot here for a moment and I don’t know if you have any thoughts on these or not, but I just want to see if you do. It’s a new year. It’s the beginning of 2009 here. Do you have any predictions for the financial markets this year? What is gold going to do? What are the other commodities going to do? What’s the DOW going to do, etc, whatever you want to say? It’s a good time to make predictions.
Chris Mayer: Yeah, well, I think it’s funny you start with gold because I think gold is really a coiled spring here now. I mean we’ve had – the government has spent such an incredible amount of money that it doesn’t have. Even the government officially acknowledges now an annual deficit of more than $1 trillion. Unofficially, it’s higher when you factor in things like Social Security and Medicare/Medicaid.
But I think gold will easily get back over $1,000.00. I think gold will hit probably something around $1,500.00 an ounce this year would be my guess. I like the precious metals.
And as far as some of the other commodities, I think that I really like natural gas. Natural gas is between five and six and I think that the market doesn’t appreciate how steep the decline rates are in natural gas production. There’s estimates out there, I think, 30 – 35 percent decline. So that just means if the natural gas industry didn’t do any new drilling that it would lose roughly a third of its production in a year’s time. I think natural gas will come back a lot quicker than people think.
And I still tend to be bullish on oil. I think we’ll probably get back over $50.00 this year at least. Again, also, we’re seeing rapid declines in production and it’s not so easy to flick it back on when you switch them off.
Jason Hartman: Yeah, I agree. It seems that oil should be $70.00, $80.00 at least. I predicted by the end of the year it would be between $70.00 – $100.00. I think this is a very artificial situation with the oil prices right now. They won’t let us –
Chris Mayer: Yeah and the only reason to look at that is to look at the marginal cost to produce the oil. At $50.00 oil, there’s a large chunk of the oil industry that isn’t going to make any money. And plus there’s all those offshore and oil sands projects that need $75.00, $80.00, $90.00 a barrel oil to work.
Jason Hartman: To make it worth it, yeah, right.
Chris Mayer: Right. So yeah, I mean early in the year, I was asked for a prediction. I said over $100.00 and so maybe I’ve lost some of my nerve as this continued to trickle down, but I certainly think oil is cheap here and a lot of the energy stocks look good to me.
Jason Hartman: How about the broader stock market, like the Dow and the S&P, where most of the shenanigans take place?
Chris Mayer: As I look more closely at the S&P 500, I don’t really see where we’re going to get any earnings growth. Commodities companies are not going to show big increases in earnings in 2009 or 2008 because the prices are so much lower, unless there’s some major, major rally in 2009, which may happen, but I think we’re looking at more of a gradual buildup.
And the financial companies, they’re not going to provide much and so where are the earnings going to come from? We have a global recession. We have companies that were providing some nice earnings. They were exporters and they’re going to show some slowdown. So I don’t really see any big earnings push on the S&P 500 and I don’t see that we’ll get a real big push to the upside on any of the market averages, so I would think that we’re kind of – I hope that we’ve seen the lows, but even then, it’s hard to say.
So I think you could be bullish on spots in the market and maybe not necessarily see any big gains overall.
Jason Hartman: What are your thoughts on deflation and inflation?
Chris Mayer: Long-term, I think we’ll see inflation. I don’t know how we get around that. I don’t know how we get around the creation of so much paper money and how that doesn’t ultimately result in the dollar buying less tomorrow or less next year than it does today, and less five years from now than it does today. Maybe in the short term it certainly appears that we have some massive deflationary forces and that’s crushed the commodities markets, and we’ve seen a lot of debt being destroyed. But I think that’s a temporary condition and I think you saw that also with the rally in the dollar.
But I don’t think those things are at all sustainable. You look at treasury securities. That’s been the place to be over the last year and those interest rates are down pretty low. What’s the ten-year treasury at now, two something?
Jason Hartman: That’s pretty low.
Chris Mayer: Yeah, so that seems to me a really bad bet. So I would think that I’m looking for inflation to pick up here as some of this money creation makes its way through the system.
Jason Hartman: That’s what everybody seems to pretty much say. Everybody, who I feel knows anything about anything, is saying inflation is coming and I agree with them. The question is what is the timeframe for that? Do you have any thoughts on timeframe?
Chris Mayer: It’s hard to say the timeframe. I think in the back half of the year we’ll start to see some more effects of that inflation, especially as the government starts to roll out its stimulus plans and it’s already done so much buying. I think the credit markets are starting to open up a little bit. The timeframe is really hard to say, but I would be surprised if let’s say we talked again next year at this time and we were still sort of confused as to what would be the main force here, inflation or deflation, that would surprise me. I think we’ll see it soon.
Jason Hartman: Inflation, yeah.
Chris Mayer: Inflation.
Jason Hartman: Yeah, I’ve kind of always felt that it’s about a year and a half to two years post bailout mania. Let that money trickle down from the banks and Wall Street. The banks are just hanging onto it right now, which I cannot believe the plan that Paulson and Bernanke arranged. It’s just disgusting that they took all that bailout money and didn’t require the banks to really do anything with it.
Chris Mayer: The whole thing is terrible.
Jason Hartman: It’s just stranger than fiction. I can’t believe that anyone would even enter into a deal like that. Certainly, if I was to do a deal with someone to put funding into my business, they would want to see some milestones. They’d have some expectations. Any thoughts on the bailouts?
Chris Mayer: Well, yeah, I’m asked about the bailouts a lot and I would just say a lot of people will seem to make it very complicated. I think anytime you have the government spending a whole lot of money that it doesn’t have, that that’s bad. I remember we had some friends over just last week and everybody, of course, wants to ask me this kind of question, and I said that basically, and they said yes, but you can’t do nothing. Why can’t you do anything? We don’t really know. We haven’t really tried. Why not let these things work themselves out?
I really don’t like the idea that we go in and we bailed out all these guys that got us into this mess in the first place, rewarding the most incompetent, the worst of the worst.
Jason Hartman: In incompetent or unethical because –
Chris Mayer: It’s some combination of both, don’t you think?
Jason Hartman: These people are supposed to be the best and brightest, the people that went to all the Ivy League schools.
Chris Mayer: Yes. One thing that’s interesting – this is just kind of a side note – but I was reading a little history of Goldman Sachs, and I had thought when I started that I would learn about how Goldman Sachs used to be much more conservative back in its partnership days and how – basically, I was thinking I would come out with the story that this recent crop of guys basically took this thing and ran it into the ground, this 100-plus-year-old franchise. But when you read the history of these kinds of enterprises, they’ve always been like this. They’ve always been on the verge of collapse.
Any kind of big mess that the economy is in, all these guys are always in it, Goldman Sachs, all the big money-centered banks, all the big investment banks. They’re always around this kind of stuff. In the ’70s, Penn Central, they were all up to their eyeballs in Penn Central debt. In the ’20s, the investment trust thing blows up. They’re all up to their eyeballs in investment trusts.
So whatever the trouble is, these guys always seem to be around it and the government is always there to sort of grease their way out. It’s just one of those interesting things that what we’re seeing now is not necessarily new, at least in some respects.
Jason Hartman: Yeah, I would certainly agree with you. I think we need to reexamine the way entities are used in this country in that there doesn’t seem to be any real downside for taking reckless risk and just running your company into the ground because they peel out all of their money out of it, pay themselves these giant salaries and comp packages, and then the investors just get burned.
One of the things I talk about in my various seminars to our real estate investors is Larry Ellison, from 2000 – 2002, his personal take from Oracle was $781 million, almost $1 billion. And in that same two years, shareholder return was negative 61 percent. That is just – that is unconscionable and there are so many examples of that, Chris, it is just rampant on Wall Street.
Chris Mayer: I’ve been kicking around the essay idea to write about this exact thing, but one of the transformations that you see in the American economy in the last, oh, I’d say 80 – 100 years or so, is this transfer from owners to basically more organization men. And as this has happened, then you also see that lack of penalty for taking big risks. There was a time when it would be absurd to hand over the reigns to a company to a guy who owns one-half of 1 percent, all in stock options.
If you look back in the early 1900s, you can imagine how different a Rockefeller would look at Standard Oil if he didn’t own a big chunk of it, or Carnegie. All these guys, they were owners, and even today, one of the things I look at when I’m looking for investments, I always like to find a company or an idea where there’s some guy there who maybe started it and he owns 25 percent of the company. He’s in it. It’s his baby. He’s working. It’s the difference between owners and renters. If you own a house versus you rent it, who’s going to take better care of it over the long haul?
Jason Hartman: And so it’s sort of a pride of ownership type of thing. They want to see their baby succeed, right? Is that what you’re saying?
Chris Mayer: Sure, and what you also see is a lot of the things that are really irritating to me as an investor – you mentioned some of them, excessive compensation, and also the way companies sort of hand out stock options like candy. It always annoys me when I do research on a stock and I see over a period of three or four or five years, you see the shares outstanding growing at 10 percent a year. And that’s quite a drag on what the shareholder then ultimately enjoys.
But if you have a guy there that’s an owner, suddenly things start to change. A lot of times, they’ll see shares start to fall over time because he’s opportunistically buying them back or he’s very careful about just giving them out.
Jason Hartman: But you know on the flipside of that argument, though, Chris, wouldn’t you say that having all those stock options and spreading the stock around is sort of like sharing the wealth, getting everybody on the bus, sitting in the right seat, moving in the right direction, where it’s sort of aligning all the troops, giving them an invested interested to stay with that company? That would be sort of the flipside of that argument, I would say.
Chris Mayer: Yeah, that’s the counter argument and there are different ways to deal with that. There are some companies who have, for example, put different requirements in that their executives have to buy a certain amount of stock or directors have to buy one times their salary in stock or one and a half or two times their salary in stock. So there are ways to make them into owners other than just giving them a piece of paper that gives them upside with no downside. I think that’s the thing you want to avoid is upside with no downside. You’re just going to give people stock options. I don’t know if that’s the best way to reward someone.
Warren Buffet’s talked about this a lot and he certainly doesn’t believe in the idea of giving people stock options. But I think that’s definitely a tough management problem. How do you bring everybody on the same side, pulling the same direction, but I think there’s got to be better ways than just presenting that free upside, the free-call option.
Jason Hartman: As an investor on the outside of any of these companies, and again, this is why I like being a direct investor and just buying my own rental properties and that’s so simple. There’s no intermediary – I call it intermediary party risk. Lately, we hear the term all the time “counter-party risk,” which I didn’t hear much about two years ago, but now I hear it all the time. You don’t have that intermediary party risk. How do you know about this, though, when investing in a company?
Chris Mayer: I agree with you entirely. For me, as an investor in a stock market, I worry about that probably more than I should, but I love the idea of very simple business. When I can find a company that has basically one line of business and it’s really clean and you can see it has very clear ownership, that has a lot of appeal to me. But those things are hard to find. If you’re going to invest that way, you basically knocked off most of the S&P 500, all the Dow because we’re facing, as an aging industrial society, you’re not going to have companies like General Electric are not going to have any significant owners. There’s going to be huge intermediary risk in those kinds of things.
So I agree with you 100 percent, and one of the discouraging things is every once in a while, you’ll see a fraud happen in an instance where you think it shouldn’t happen, the whole computer thing in India.
Jason Hartman: Oh, that’s the new one that we’re hearing about now.
Chris Mayer: Yeah, that’s like the Indian Enron.
Jason Hartman: The Indian Enron, exactly. I read an article about that yesterday.
Chris Mayer: Right. The scary thing about that is the chief perpetrator was the guy who started the company in ’87, owned a pretty good chunk of it, so even then, you still never know.
Jason Hartman: Look at Birney Madoff. He’s the guy, right?
Chris Mayer: Yeah. So I was going to say I was in commercial banking for ten years before I started writing this newsletter and one of the things we always emphasized was “C” for character. We had the four C’s, credit, collateral, cash flow, and character. There’s really no substitute. If all the other things lined up in a row and you still can’t really trust the character of the bar, the character of the people you’re dealing with, then you can’t do the deal.
So one of the things I do as an investor I try to listen or meet or at least hear the top guy present and see the management team. Not that that necessarily is going to protect you, but sometimes, you just have to rely on your ability to judge character and if these are people you can trust. Look at their background. Have they been in business for a long time? There’s no foolproof way, but there’s some things you can do to try to at least diminish that intermediary risk you talked about.
Jason Hartman: Sure. The problem is, though, for the typical investor, who’s not in the business as you are, how do we judge the character? And even then, you may be wrong. Certainly, con artists, the definition of a con artists is a very likeable, charismatic person usually, who sucks you in and then takes advantage of you.
Chris Mayer: If you’re not in the business and you can’t do that kind of research, it’s very hard. Like I said, it’s one of the things I think a lot about. It’s just one of those risks you take when invest in a stock. But one of the other things is if you see a guy who’s overly promotional, that’s usually a bad sign. I’ve been to a lot of different meetings and sometimes you can tell when guys are pretty straightforward and sometimes you can tell when they’re more promotional.
But like you say, there’s no foolproof way on that. That’s a risk you take when you put your money in a company or a stock.
Jason Hartman: Sure, sure. Going back to your Chapter 1, The Tale of Two Markets, and I know you touched on that before as it applies to your general philosophy of investing, but I wanted to just maybe talk to you a little bit about real estate, if you have any thoughts on that. We kind of believe that all real estate is local, so there are very bad markets, bubble markets, which are bursting and have about another 10 – 15 percent decline ahead of them in my opinion. And then there are markets that are pretty linear and solid and just sort of chug along and do their thing. My special area of interest in this discussion is to talk to you about international stuff, like you were born in Buenos Aires and I was there about five months ago and looked at real estate. I met with one of the International Living affiliates over there and looked at properties, and I just wanted to get your fairly broad take on any thoughts you might have.
Chris Mayer: I love real estate as an asset just because it’s usually simple and clean and the building can’t move. And especially commercial property, you look at it and you’ve got leases coming in and it’s usually an easy matter to figure out what your cash flow is going to be and all that sort of stuff.
And certainly, when I was a banker, we had that saying all the time, too. Real estate is a local thing and there can be huge differences in real estate markets even a mile away, so it’s hard to make too many general comments, although I’m always interested. I think real estate, commercial real estate, is probably in for some hard years in general just speaking nationally. But there are some that I would be interested in still holding. There are still some companies out there that are pretty opportunistic when it comes to putting together deals and these are the kind of things that as an investor, now is the time to keep your eyes open for deals because you’ll probably get them.
Jason Hartman: Tell us about your thoughts about Argentina. We talked a little bit about that off-tape here before we started recording. Did you have any thoughts on that? I know Bill Bonner talks about it and I just always find it interesting to read about, but I went there and I just found that it was pretty expensive and felt like I already missed the run-up.
Chris Mayer: I guess that I agree with you that there has been a big run-up. When you look at it internationally and compare it to some other markets maybe, it still looks pretty cheap. And certainly, if you get out into the country, I’ve been out to some of the western part of the country. There’s a lot of cheap stuff, but it’s cheap for a reason because it’s hard to get to.
So in general, I’m not as bullish in Argentina as I was maybe a year and a half ago. A lot has changed since and certainly I don’t think it’s the kind place to be in a credit crisis because prices probably won’t hold up there, although the Argentine markets are not particularly leveraged either. There’s not much of a mortgage market there. You pay for cash for properties most of the time. I still like some pieces down there, but I’m not really bullish on it anymore.
Jason Hartman: Tell us a little bit about the pension crisis over there. It looks like the government’s going to take over the pensions and boy, that’s going to be –
Chris Mayer: Yeah, that was kind of the final straw for me also. It’s always been a big risk –
Jason Hartman: That’s going to be a huge socialist fraud, right?
Chris Mayer: Yeah, I mean that’s always been a big risk with Argentina, but I think they even broke new ground when they did that. They basically nationalized private pensions, so if you had a 401k there, the government just took it and now put you in the state-sponsored program.
So the dollar amounts involved – I think it was $29 – $30 billion dollars – is a lot of money and Argentina needed it. So they took it.
Jason Hartman: They just took it.
Chris Mayer: They just took it. And I’ve been reading that they were the first South American country just to make an outright confiscation of cash.
Jason Hartman: Speaking of confiscation, that’s one of the fears I have about gold and any real asset like metals and so forth. People say that can’t happen in America. Well, it already did in 1933.
Chris Mayer: It already did, yeah.
Jason Hartman: Any thoughts on the confiscation issue when it comes to the metals?
Chris Mayer: Well, I don’t know. I guess it would have to get pretty bad for that to happen. That’s a possibility. Like you say, it’s happened before, so why can’t it happen again. I don’t know. I don’t know how you protect yourself against that if you start having to fight even your own government.
Jason Hartman: The government’s going to win.
Chris Mayer: Yeah, I think they’re going to win. I think they’ll win that one.
Jason Hartman: They always do. Any thoughts on the gold price manipulation issue? You look at groups like GATA and you just gotta think that gold should be worth $2,000.00 an ounce right now based on inflation and based on this crazy uncertainty in the world. But the Plunge Protection Team, I interviewed Allen Brown on my show and a few others that have talked about this, and manipulations in the stock markets, too. Just the manipulation subject in general, what are your thoughts there?
Chris Mayer: I don’t know that I have many thoughts on the manipulation of gold, but I will say that I just don’t think that gold is on people’s radar screens, particularly the big money where it would really make a big difference. I have a good friend of mine who works for an investment consulting firm and he consults, telling pension funds and institutions on how and where to invest, and I talk to him all the time about this and he’s very bullish on gold. But when it comes to whether or not they can recommend it to their clients, he says well, we really can’t. We can’t recommend gold to our clients. We can’t. That’s because even if they were to put a small allocation, even 1 percent or something, in gold, the amount of money that would come to the gold market would just blow it all out of whack.
So I think there’s a large pool of money that just will not consider gold, at least at this point. So you’re talking about educating people about it and I think eventually, if gold does hit $1,500.00 or $2,000.00 like we’re talking about, it will get enough attention and maybe then, it will attract some of the extra money. But I still think there’s a large part of the market that just doesn’t even consider gold at all.
Jason Hartman: Well, I think you’re right. You’re certainly not going to hear any recommendations from your advisor at Merrill Lynch or Ameriprise probably on investing in these commodities and resources, which I think are just the backbone and the surest thing going, versus these complex financial products that all seem to be geared toward making the people that create them the money and not the investor.
Chris Mayer: Right. Not even the complex financial products, but the companies themselves. How can anybody make sense of Citigroup or make sense of even General Electric. These things start to trickle in all kinds of places. I wrote a story a little while ago about how there were some overseas companies where they got in all kinds of trouble speculating on currencies and so it was like Mexico’s No. 3 retailer was basically bankrupt because of their currency debts. I mean that’s something as an investor you look at and think all right, it’s a grocery store, a very simple business, and yet it went under because of all kinds of complicated things you could never have anticipated.
So I agree with you 100 percent. I think there’s a lot of complexity and there’s a lot of leverage still in the system and in places where it’s hard to ferret out, and commodities are really just the basic simple things that human beings will need for a long time yet.
Jason Hartman: Yeah, I definitely agree with you there. Chris Mayer, this has been a very interesting discussion. Anything you’d like to say just to wrap it up?
Chris Mayer: I’ll just say that for commodity investors in particular, it was a nasty second half of 2008, but I think be patient, use the lower prices to pick up some bargains here now, and then it will look good in a few years. So overall, I still think I’m pretty hopeful about investing in a lot of this stuff and it will pay off soon.
Jason Hartman: Good. Good stuff. Let’s make sure we give people the information as to where they can find your newsletter and your book.
Chris Mayer: The book is called Invest like a Dealmaker and you can get it really anywhere, Amazon, or any other bookseller. And then if you’re interested in the newsletter, I would just send people over to www.dailyreckoning.com. A com is there and it’s a free daily letter we put out and you can also learn more about my newsletter at that site.
Jason Hartman: Good stuff. Well, Chris Mayer, thank you so much for being on the show.
Chris Mayer: Great. Thanks for having me.
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Duration: 58 minutes