#297: What Stocks to Buy During the AI Bubble (w/ Porter Stansberry)

22:29Porter Stansberry:And so no one's heard of it. It's not in any index funds yet. It's completely an orphan. It's a really incredible story. Okay.

22:36Emmet:FOMO at 10. you've written extensively about fear and greed and indeed human behavior. In your view, what psychological trait most cleanly separates investors who manage to compound wealth from those who are constantly resetting to zero and losing their nerve, you might say?

23:00Porter Stansberry:That's a very important question and it's very underappreciated. to be a successful investor you have to have an incredible amount of emotional reserve if you're the kind of person who you know who spooks easily or who falls in love with things it won't work very well for you you need to be you need to be um spock-like if you recall the old american television show star trek you need to be you need to disengage from your limbic system And you need to make sure your frontal lobe is in control at all times. The other thing I will tell you is great. This is just an incredible truism that I learned from one of my mentors.

23:42Porter Stansberry:Investors are people who buy from pessimists and sell to optimists.

23:50Emmet:Yeah. Yeah. Oh, yeah. That's what they're going for, for sure.

23:54Porter Stansberry:So, yeah, you have to tilt a little towards the optimism. But it's astounding to me if you look back at the history of the capital markets. You know, the capital markets have survived World War I, World War II. They survived the introduction of nuclear power, including nuclear bombs. They've survived the Cold War. They've survived, you know, Coca-Cola is, in my opinion, far safer to own than a U.S. Treasury bond. And if you ask me, do I want to have a million dollars in Coke stock or a million dollars in gold, I tell you a million dollars in Coke stock all day long. For sure. And it's amazing that even though these things are absolutely abundantly clear and obvious to anyone who even looks at it for 10 seconds, it's still amazing how many people manage to lose money investing.

24:47Porter Stansberry:To me, it's just shocking. It ain't that hard.

24:53Emmet:Well, that's a lovely segue into a stock that a few weeks ago I pitched here on Stock Club podcast. And then I saw you mention it recently on X and it is waste management who have just constantly raised their dividend. I think you said there was, I don't have it from me, but you kind of alluded that there's very few businesses as class as waste management. And is it a business you own in your folio? And would you buy today?

25:26Porter Stansberry:A great question. I can't really speak to it today. I haven't looked at it in detail lately. But I have been an investor in waste management companies for some time. I use them in my portfolio in replacement of bonds. So I don't like investing in fixed income because of the constant inflationary risks. So instead, I invest in things like property and casualty insurance companies, which are big, they're just big portfolios of bonds with an underwriting unit on top. And I invest in things like waste management, auto parts stores, other things that have operations that are so fundamental to the economy that nothing can happen without them.

26:08Porter Stansberry:And so in that regard, their earnings are much more reliable and much more similar to a fixed income coupon than the earnings would be in a lot of other types of businesses.

26:18Emmet:Great, great answer. I understand that in general, you're quite skeptical of home builders, if I'm right, as an investment, because they're very capital intensive and usually debt heavy, cyclical. Is there any home builder you particularly like?

26:34Porter Stansberry:Yeah, you know, what's interesting is that's becoming less true. So for many, many, many years, one of my great investment case studies and the lessons that I would always present to groups of investors to help them understand why capital efficiency is so important. And what I mean by that is a company that can generate a billion dollars on a capital base of$100 million is worth a whole lot more than a company that has a capital base of$10 billion to generate the same billion in profit. And you want to be in the asset light business because more of the earnings will be able to be recycled into share repurchases or dividends instead of having to be invested in the business to continue to grow it.

27:18Porter Stansberry:These things, when you think about them for a second, they're pretty obvious. But when investors price earnings, they mostly ignore capital efficiency. So you might see a capital efficient business trading at 15 times earnings and a heavy capital business trading at 15 times earnings. That doesn't make sense. you're much better off buying the capital light business. And the example that I would always use is the share, the home builder called NVR. And I've been an investor in NVR since 2007. Ironically, I said, look, we're going to have a huge housing crisis. And when NVR trades below$400, which it will, because it's going to get sold off with all the home builders, that's when you should buy it.

27:59Porter Stansberry:That stock today is around$8 ,000. Whoa. So, what made NVR very different, this is now going back almost 20 years, what made NVR very different at the time was it was the only home builder that did not invest in land. And it didn't invest in land because it had gone bankrupt in the early 90s because of its land portfolio. And when it emerged from bankruptcy, the new owners absolutely verboten to own land. And so, it was the first Capital Light home builder. Now, since then, many of the home builders, including the major national home builders, have begun to spin off their property portfolios as a separately traded REIT.

28:41Porter Stansberry:And then they have become much more like NVR in the asset-like category. But even still, NVR is still the leader in that model where 99 % of all the homes they build are on somebody else's lot. and so uh that's that's that's why i i had it wasn't what i think you might have seen in the past was me being critical of the other home builders yes but it wasn't it wasn't it wasn't really about home building per se it was about the business model that the asset heavy model

29:16Emmet:versus the asset light model i took something uh our three core concepts from something you wrote I'd say about a year ago and the first thing you said was asset allocation matters more than picking stocks so like how you spread your money across all the various assets the second thing I took was matching risk to your time horizon and temperament is really important and the third thing which brings me to my question is be patient most of the time but aggressive when value is extreme um on that on that last one can you see any extreme value anywhere at the moment

29:57Porter Stansberry:no unfortunately um we are we are in the we are at a period of time which is you know we are at such an extreme in terms of global credit creation and such an we're at such an extreme in terms of credit spreads. So there's virtually no difference in the market today between a corporate credit and a treasury. And that just means that the credit spigot is wide open. So there is nowhere in the economy right now is anybody pricing in the risk of default on anything. And as a result, all evaluations are extremes. Yeah, it's very, very difficult to find any good value today.

30:46Emmet:And that kind of says to me, Porter, that there must be some dangerous financial narratives being sold to ordinary investors at the moment.

30:55Porter Stansberry:Well, there always is. Yeah, that is true. There's not much better business in the world than selling schlock to investors, unfortunately.

31:10Emmet:That's so true. so um okay let's change gear for one millisecond what's your favorite band and we are and musician am i going to get you this is kind of changing your your frame of mind as we move into the next

31:22Porter Stansberry:phase that is just so tough um i'm so random i love i love music i love all kinds of music i think the best the best songwriter over the last you know whatever a couple decades are are either Post Malone or Chris Isbell. Sorry, Jason Isbell. I don't know if you've ever listened to Jason Isbell, but he's just an incredible singer-songwriter.

31:49Emmet:He was at the Grammys last night. I saw him in the audience.

31:52Porter Stansberry:Oh, yeah, yeah. He's an incredible talent. But yeah, I love all kinds of music, and I think it's interesting that Post Malone's music can both be rap or can be folk country.

32:08Emmet:It's fascinating. Okay, well, that's the gear in your mind changed. And I'm that's getting you warmed up, if you like, for a game called, it's the easiest game in the world, buy, hold or sell. But here's the thing, you can go buy, hold, sell or pass if you're just it's outside your knowledge at the moment. So I'm going to name a company with zero research and preparation, and just your intuition, you go buy, sell or pass.

32:34Porter Stansberry:Waste management. Okay, so hold on though.

32:36Emmet:Okay, let's put the parameters in place.

32:39Porter Stansberry:Well, when you say buy, what's your...

32:43Emmet:Okay, let me, let me, on a long portfolio, would you buy shares in a long folio if they were locked away for 10 years?

32:51Porter Stansberry:Okay, so this is a 10-year long-term buy. Okay, that makes it a lot easier because then I don't really have to worry about valuation.

32:58Emmet:Yeah, exactly. So you kind of, we're speaking to the business model management team, the stuff you've absorbed. Okay.

33:04Porter Stansberry:Waste management.

33:06Emmet:Sure, absolutely.

33:08Porter Stansberry:One of the highest quality businesses in the world.

33:11Emmet:Tesla. No.

33:14Porter Stansberry:Sell.

33:16Emmet:Sell. Interesting. Intercontinental exchange. Pass. Lockheed Martin. Buy. Berkshire Hathaway. Sell. Amazon.

33:34Porter Stansberry:on the Berkshire. If, or I should say when they spin off their property and casualty insurance company, then buy. But their operating businesses are a bunch of garbage.

33:46Emmet:Really? That's a podcast unto itself. And I don't want to drag you into a grand that you don't want to talk about, but is there any more you can give us?

33:55Porter Stansberry:Oh, yeah. If you go back and you look, and I've done all this research and I have an essay about it that I'm happy to send you. If you go back and look at every single one of Berkshire's large take private deals. So, for example, the purchase of Mid-America Energy. So they've put roughly$100 billion into Mid-America Energy and other regulated utilities since 2000. Their return on invested capital today is about minus 40%. Right. Disastrous investment. And no one realizes it because it's private. it. So it's hidden in the conglomerate, but you can see the facts. If instead you had simply bought, what's the biggest, most credible, largest energy company that's publicly traded in the world as of 2000?

34:46Porter Stansberry:It's X-Mobile. Yeah.

34:47Emmet:Oh yeah. X-Mobile, of course.

34:48Porter Stansberry:Right. So in other words, I'm not, I'm not trying to like be a rear looking trader. I'm just telling you if, if you, if your choice was buy the largest publicly traded thing or buy what Buffett's buying. In every case, he gets blown away by the public analog. So think about this. He sold shares of McDonald's to buy Dairy Queen, to take Dairy Queen private. Would you rather own McDonald's or Dairy Queen? Today, McDonald's, of course. Of course. So what I'm saying is, what's the largest publicly traded analog? He's buying a quick serve restaurant business. Well, the largest publicly traded analog is McDonald's.

35:26Porter Stansberry:He's buying an energy company. What's the largest publicly traded analog? It's ExxonMobil. If you go back and you do that analysis for every single one of his take private transactions, if they had done the public analog instead of the take private deal, then Berkshire Hathaway would be a$6 trillion business or something like that. It'd be massively larger. Another case in point, he spent$55 million buying that crappy Nebraska furniture mart remember how he loves to brag about mrs b and how sweet she is she's 100 years old okay well what was the largest publicly traded analog to nebraska furniture mart in 1985 take

36:04Emmet:a guess hooker furniture home depot home depot and home depot has made 26 a year since 1985

36:13Porter Stansberry:for investors so we should rather have mrs b or home depot

36:21Porter Stansberry:okay the reason the reason why warren buffett is the world's greatest investor is not because he was a very good investor he was an average investor he's the world's best investor because he was investing billions of other people's money he had this enormous pile of float year and a 70 year runway yeah so he basically he had the equivalent of 6x leverage in his portfolio and that is what explains all the outperformance the his average annualized return without the

36:50Emmet:leverage is about 12 which is very average yeah that's s &p stuff so okay well i'm not gonna ask anymore because that's a great way to finish the quickfire round i'm gonna conclude porter by asking you about desert island stocks so without divulging anything that's privy to your paying members if you to own just two or three businesses for the next 20 years just a reminder that profit lets you benefit from successful stock investing without having to constantly think about it every four weeks it tells you exactly what to sell from your 10 stock portfolio and what to buy with the proceeds stick with the process through good markets and bad and 17 years of rigorous testing suggest you'll be very glad you did sign up today i'd start by emailing frank at my wall street.com if there's a discount going he has it okay on with the show what would you buy and hold today philip morris oh i knew you'd say that i knew you'd say that yeah is that's it that is it philip

37:59Porter Stansberry:morris would you would you buy a second philip morris uh is gonna outperform everything else

38:06Emmet:well that is one heck of an insight give us more tell us more why well do you know how much if you

38:14Porter Stansberry:put a dollar into philip morris and 1919 when it first sold securities to the public do you know how much money you'd have now from that one dollar this is probably like the rice and the chessboard

38:27Emmet:thing uh where you double it on every square i do not know i'm not going to divulge my mathematical ignorance with that kind of exponential mathematics about 4 million right right so

38:40Porter Stansberry:16 16 16 a year annualized return for more than 100 years so nothing nothing in the history of capitalism has made more money than philip morris nothing else comes close so just as i put you on

38:58Emmet:the spot by hitting you with names that i didn't prime you with uh it's coming right back at me because my hot take which is based on nothing except you know osmosis is that philip morris's business is going into decline i must be wrong yeah i think you're wrong i think most people

39:17Porter Stansberry:just don't understand what an incredible business philip morris is do you know do you know who invented the light beer?

39:27Emmet:Constellation brands, maybe?

39:30Porter Stansberry:Philip Morris.

39:31Emmet:You know, I kind of, I should have really said Philip Morris, considering our conversation.

39:36Porter Stansberry:So Philip Morris bought a brewer from Chicago out of bankruptcy in 1971. Forgive me if my dates are not exact. But they bought this brewery out of bankruptcy because it had a formula for light beer and they relaunched that beer as light l-i-t-e in 1972 and within three years of the launch of that product it was the best-selling

40:06Emmet:beer in the world and what was the name of what was the brand miller miller yeah okay um that is Miller Lite. Miller Lite, of course.

40:17Porter Stansberry:So people really don't understand what Philip Morris is, is the world's very best global branding and marketing business. And it's the best it's ever been. They created Marlboro. And they were very savvy about this. In America, the Marlboro man was a cowboy. But in Europe, he was an F1 driver.

40:38Emmet:Oh, yeah. It's the aspiration. Yeah. It's just so brilliant understanding the different cultures and the different ideas of masculinity in the different places.

40:47Porter Stansberry:They're absolutely brilliant. And the death of a cigarette is vastly overrated or whatever, overstated. Yeah, there's a quote in there. Cigarette volumes are increasing globally, not decreasing.

41:02Emmet:I never would have guessed.

41:03Porter Stansberry:And watch content. If you watch Netflix, how many people were smoking cigarettes on Peaky Blinders?

41:10Emmet:Probably plenty. I haven't seen the show, but probably plenty. Right, right.

41:15Porter Stansberry:All of them. So it's just the ways that they find to get their marketing out are still very savvy, very sophisticated. And they're just the best in the world at doing M &A around great consumer products. So what is it now? Four years ago, I believe, they bought a business called Swedish Match. and the whole history of the Swedish Match Company is really interesting. If you want to read a good book, go read the history of Swedish Match. It's extraordinary. It was started by a corrupt fellow selling or buying match monopolies all around the world. And I can't remember his name right now. It escapes me.

41:58Porter Stansberry:But he ended up, he ended up, it was giant financial fraud underlying all this and he ended up killing himself. But Swedish Match continued and Philip Morris bought it about four years ago because they had this new kind of nicotine product called Zen. And Zen is a cornstarch infused with nicotine that you put on your gum in a little package. And so it allows people...

42:24Emmet:Very Swedish.

42:25Porter Stansberry:It allows people to enjoy their nicotine addiction without carcinogens.

42:31Emmet:And you go off to Sweden, They always wear these little nicotine patches inside their gum. You could be talking to someone in Stockholm and you're thinking, what's wrong? Are they a boxer? No, they're wearing these little nicotine patches inside their gum.

42:45Porter Stansberry:Yeah, we call them lip pillows.

42:47Emmet:Lip pillows.

42:49Porter Stansberry:Anyways, that part of Philip Morris' business is growing dramatically. And they control about 75 % of the total global market for those kinds of nicotine pouches. They also have this incredible new heated tobacco product called Icos, I-C-O-S. And it's the thing to have if you want to smoke in Japan. And it's an electronic cigarette, but it actually warms up a Tabasco. a tobacco stick. And so it gives you the exact sensation of smoking, but it does so without lighting it. And so therefore it doesn't have the same amount of carcinogens. It's much safer. It's much easier on your lungs, et cetera.

43:38Porter Stansberry:And that product, Icos, is only now launching in the United States. In 10 years, that product alone will be another$10 billion business for them in the US.

43:49Emmet:That is fascinating. I'm so glad we dived into that thank you for that porter so that's my desert iron that's my desert desert island stock wonderful choice i never thought you'd change my mind in such a short period of time on a business that i'd somewhat put into the vice bucket in decline not relevant makes you sick and even all those different diverse or sorry related diversifications are just absolutely on point

44:14Porter Stansberry:can i say one more thing about philip morris please do and this this will make a lot of people very upset. But look, I'm a realist. I didn't create this. I didn't make the rules. I'm just describing them.

44:28Emmet:Okay.

44:28Porter Stansberry:You think about how many humans that there are in the world. And think about how many of them are capable of producing anything or compounding capital in any way. Not many. Lots of people are good at consuming. Very few people are good at producing. Very few, remarkably few. There's a reason why 1 % of the people own half the world. It's because they're that much smarter and faster and better. They just are. The reason why Philip Morris will always be the highest profits in all of capitalism is because they figured out a way to make billions of worthless people miniature compounding machines. people who cannot save a dime in their lives will find five dollars for a pack of cigarettes every goddamn day you want you want to see a mode want to see a motivated human being go talk to a crack addict they find a way and so if you went into ireland in 1970s everybody well most people

45:30Emmet:were poor like they lived within their means they couldn't go much further than their needs but everybody smoked everybody always had a cigarette so that that is the that is the secret

45:42Porter Stansberry:mad genius of what they do and it is an unstoppable economic force that's an absolutely perfect ending

45:50Emmet:uh porter as you said at the top of the show i'm really looking forward to seeing you meeting you in person in a few weeks time at the tail end of march here in dublin we'll tell our listeners more about that uh as we get closer to the date in the meantime all that remains is for me to thank you sincerely for joining me on Stock Club today and happy investing.

46:10Porter Stansberry:Thanks, Emma. It was a great pleasure to be here. I look forward to seeing you in a couple of weeks.