Business

A Fireside Chat with Jim Chanos

Schechter Wealth

H/T @pradeeepk

Published on Dec 21, 2017
The full-video from Schechter’s event with famed short-seller Jim Chanos and Quicken Loans founder Dan Gilbert at The M@dison in downtown Detroit on December 13, 2017.

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About Schechter:
Schechter is a boutique, third-generation wealth advisory and financial services firm. For over 75 years, our multi-disciplined team consisting of JDs, CPAs, LLMs, CLUs, PFSs, CAPs, MBAs, CFA® charterholders, CFP® practitioners and CIMA® consultants have been quietly advising wealthy families on financial matters including: Institutional quality investment advisory services, alternative investments, advanced life insurance planning, income and estate taxes, business succession and charitable planning.

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We met Jim with Jim through a client earlier this year. The client had been invested with Jim for years and experiencing great returns but had some questions about how he could potentially shelter and eliminate the taxes. So we started talking with Jim and through multiple meetings we decided he'd be a great fun to offer in the private placement life insurance area.

[00:00:35] And he plans to launch that fund in February of this year.

[00:00:40] Jim has a knack for uncovering and exposing overvalued businesses and industries and is famous for his short on Enron which was highlighted on the Showtime series billion's earlier this year in a poker scene with Bobby AXELROD. AXELROD Jim's views on the markets China U.S. health care the energy sector Tesla are all covered in the press very frequently. And we'll be talking about all of them today. And we're excited about the pairing of Jim and Dan Gilbert a champion of Detroit founder of Quicken Loans and the proud owner of a sports team that's won 15 of the past 16 games. Dan's an amazing investor his passion and views translate more into more than just return they translate into meaningful change and opportunity for the city of Detroit and for industry with that pause for a quick video on what's been going on in Detroit and within Steve. When you've been a leader. Your entire life. He learned how to turn one day into day one.

[00:02:15] To do it first to be an innovator means you may stumble you may fall but relentless you will move forward. Detroiters are born movie Wings have a deep history. Our roads paved the way for every future highway. Tomorrow international hub full of vitality of Michigan's strength from the global reach of techno and Motown to the powerful from. Style trends to technology. Detroit is the story line of the world's imagination. We are always shaping moving cultivating what's next. We are smart business savvy and billion dollar business both. A state full of 230 foot pine trees and the summer destination of the monarch butterfly. Surrounded. By the beauty. Of Great Lakes. Choi. Is always Grong. Always and.

[00:03:25] We don't wait for someone else to do it. We don't have time to stand still. Not everyone will understand our pain. But the baton was placed in our hands. So we're finishing strong. This is home. You own the pearl. If you move here. You move the world. Who else designed the mobility of tomorrow. Besides the most resilient people on the planet. Custom made bikes and shiny rims autonomous vehicles and alternative energy mobility as a right and diverse cultural community.

[00:03:56] Land the foundation of collective steel Michigan hands holding up families designing possibility creating space. We are the solution energies forging our way toward the answer as a sacred historical place fearlessly stepping up to the plate.

[00:04:14] We are infinite possibilities and our future can't wait. Detroiters have always kept this country moving. Are DNA connected to a passionate work ethic and authenticity we earned from grandfathers and freethinking mothers we watch with hardheaded Tubac swagger go. Into dinner for our families. Born on an assembly line of ideas. Thinkers educators scientists coaches and philanthropists we are southern class. And clean Cadillac's. Humility and matter of fact. We are a century old farmer's market the heart and soul of this country's future. The steady sound of design and innovation. And a whole other country. Is just a bridge away. Chases. Built. Detroit. Design. Design the world. Build. Your. Build the world. Here. Create. The World. Move. The word.

[00:05:32] That was great. I don't know how Amazon can't pick Detroit for its second headquarters after seeing that. So it's a fitting homecoming for Jim who actually went to high school Birmingham groves to be back here in Detroit sitting down with Dan Gilbert for what we all know will be a special treat and great conversation. Be on behalf of myself and the entire Shechter team. We thank you all for being here. And please enjoy. Dan and Jim. Is.

[00:06:06] That your walkout song. I'm ready to move back here after that video. So glad to have you for sure. So.

[00:06:15] I don't I don't really know where to start. I've got so much to ask you and we've got a chance to talk a little bit and a lot of you a lot of YouTube and you're more than I would ever thought sort of under you know you say you're an actor now. How did that go.

[00:06:30] So the Showtime people I know Brian Koppelman David Leavitt Andrew Sorkin the creators of billions and when they started the project we had dinner and I said we were a little worried about the dialogue and some of the plot things. Can we run some of this stuff by you just as a friend to make sure that we're getting the jargon right that it's believable it's fiction but and so I said sure. You know just shoot me if you have any questions shoot me a thing. To my horror I saw that that would give us spoilers but you know one of the plots at the end of season 2 was was X infects a certain foodstuff to get food poisoning and shorts the stock and like no no no no no this is not this is not good. But anyway we had some fun and they put me in a scene at the poker tournament which is a lot of fun.

[00:07:24] You know I watch that series and I watch very little Telegin that one is that you think it's we're not I spent too much time and you think that's. I mean Bobby Axelrod is that a typical hedge fund guy.

[00:07:34] Bobby Axelrod is kind of a you know composite of a lot of people and it's sort of like everybody thought they were Gordon Gekko back in the 80s when Wall Street came out and everyone on Wall Street all the hedge fund groups like well you know I'm sure that's like me and I keep saying no you don't want to be that guy he's not the most Tesco guy right.

[00:07:54] He comes up to the line and then he said Yeah yeah he's passed it a few times. But anyway it's fiction it's fun. It's not a joke with the writers of said OK why don't you come to my seventh floor where my research term team hangs out. They are not Abercrombie and Fitch models with chiseled the six pack abs their butts are shlubs with fleg take out chinese or their desk and fluorescent light pads. This is a reality it's not a glass you know a glass cube in Greenwich. It's more like this so it's it's not that glamorous.

[00:08:27] Let's let's go back to the Walcot unglamorous start but Locky Wisconsin yeah trees. Yeah. Then you come over here in ninth grade and you go to a high school graduate high school. Yeah yeah. So. So I know the school hasn't changed probably since the late so I hope but not much. And so then you graduate you go to Yale. You work on Wall Street a little bit and you just open up a fund raiser in 1985. So so you're unusual because for a lot of reasons but this one especially. I mean there's not a lot of guys who are primarily short for a living. So tell us how are you. I mean are you kind of guy that you go and you play that don't pass the craps table. I just don't always get it. I mean why why why where did that come from.

[00:09:13] I guess so. So my oldest son once said Dad's a glass half empty kind of guy and I think that's about I think he actually has a little bit wrong.

[00:09:20] Others have said Reno where you dropped on your head at birth. But but you know I like to say that the short sellers and I'm sitting with one of the ultimate capitalis here but short sold shows are also the ultimate capitalists right. Because for capitalism to work that you have to allocate capital correctly and you also have to be careful that you don't misallocated or be subject to fraud. And short sellers are the only time real time market detectives out there. I've always joked that the regulators and law enforcement are like archaeology financial archaeologists they'll tell you ten years after the fact. Why you lost money.

[00:09:56] The short sellers are incentivized to actually to ferret out the problems in real time. You guys you said something. We're talking over lunch you said that short sellers actually play a role and they keep Wall Street honest.

[00:10:08] Yes they have incentive to incentivize by the marketplace. You know in the interest of our clients and ourselves obviously but to ferret this stuff out. And you know what we hope will be short lots of things that have business model problems. You know the real home runs and the things that people remember before the end runs and the value in pharmaceuticals. You know those the Drexel Burnham companies Boston Chicken Boston Co. Yeah. There's a lot of them. And so and the idea is is that people will throw money at it not only bad ventures but fraudulent ventures. I teach a course on the history of financial fraud where you teach. I teach that at my alma mater but I also teach it at my family's alma mater University of Wisconsin. I know I'm in Michigan Michigan State. Here but go Badgers. And that is the course has been a lot of fun but one of the things they teach is that the finish the fraud cycle follows the financial cycle with a lag. So that is bull markets progress people's sense of disbelief drops and they get more and more willing to chase returns and chase too good to be true ideas and most frauds at their core are Ponzi schemes in effect. And when the market turns down people pull back they pull their money and they they want redemptions. And that's when the Madoff. So the world and others you know have problems. And so it's interesting we go back all the way to the 16 80s the first IPO cycle I think we go back not out while we're learning that.

[00:11:49] But the first IPO cycle was diving bell companies of all things that that that that someone found treasure on the floor of the Caribbean they had diving bells where they pumped air and cast iron things that people would go look for. You know the bottom of the sea and go look for treasure. Well of course like anything in capitalism immediately the bad guys figured out that could sold the sea floor with some gold doubloons and show a demonstration come up totally gold and they could sell shares in these.

[00:12:19] So this is as old as financial market has been going on a long time. Exactly. So are you are you a buyer of the I guess the famous story of Joe Kennedy John Kennedy his father who apparently either shorted the market or got out of the market very different and crashed because people who otherwise weren't buying stocks. You know the guys who work in the streets or whatever all of a sudden start asking him about stocks. The theory being the last guys to buy there's no one left to buy anymore. Is that something you.

[00:12:49] So so you know these anecdotal things you might be a little careful of because you know while there's always anecdotes at the bottom and the top a lot of them show up well before bottoms bottom the top. Having said that to sort of things struck three three stories strike out from my history on that in 1999 my my wonderful lovely Aunt Kathy from focaccia Lake Wisconsin who had followed the Beardstown lady and started a stock club with her girlfriends in the mid 90s and from 96 to 99 it was always sort of pestering me for stock ideas. She could take to the girls. She's short anything now. Now I don't know. I gave her a nice conservative long ideas dad and in 1999 she started calling me to give me stock ideas and I kind of explained her and Kathy you like you know it it's tough for the professionals to beat the market. You know be careful. The second one was when a nightlife guy who started out as a doorman and then became a promoter and whatever I knew in Miami actually got him self a marquee name as a developer in Miami in 2005 putting up apartment building Miami condos in 2005 and six let go when the doormen are actually putting up buildings you got to maybe be a little careful. Finally also in Miami the lovely guy who drives from Miami for the last 12 years actually has never asked me about a stock or financial advice ever in the 12 years we've known each other. Last Wednesday when I was down there asked me about bitcoin. So I don't know we'll see.

[00:14:25] I don't know if it was going to hit on that. Yeah. So it's you know it just struck me is ok all these years you've known me never asked me about the stock stock. But you're asking me about bitcoin.

[00:14:37] So I mean my 16 year old figured out how to get it now whenever that's called coin base. Right. Yeah. Yeah the markets for 20 bucks in the summer. Now it's worth what is worth ten times to mine.

[00:14:49] A friend of mine this week and told me his daughter in her private school in Manhattan. There's a kid in the private school a bit in her class has a bitcoin millionaire.

[00:14:59] So it was their way with the future things for us to short a coin.

[00:15:05] Can we shorten it. I think well the future is that the future is now trading theoretically in English already.

[00:15:10] I mean that's something you are doing that you don't. Now we have no edge there. I mean it's it's a speculative mania. I mean it's Beanie Babies it's whatever. I mean the the the technology is real but the CEOs are questionable.

[00:15:24] What does that stand for. So the initial coin offering. So what's happening away from Bitcoin and from block chain is that people are now setting up ISO's to finance ventures. So rather than selling shares they're basically in exchange for your cash you're getting founders coins and somebody explained this best in a new York Times profile. One of the original inventors of doge coin he had he set it perfectly he said. So investing in an IPO he's telling people to avoid like the plague is like me saying boy started an online Internet casino and I'm going to basically ask Dan to put up some money initial capital. But instead of stock he's going to get founders chips and those chips that value will be variable depending on how many people come to the casino how much they gamble online and whether or not my online casino gets regulated. Now instead of.

[00:16:21] Me being Dad's friend imagine I'm a stranger on the internet. I may or may not know how to open an online casino and if I take all his money and buy a fleet of Porsche's he has no recourse to me. That's NYCO. So instead of the new currencies instead of stocks or no equity income right there are tokens tokens in ventures that will have a so they're really not much different than nonmarket equities right. I mean if we think about it but because of what's happening like dot com and you remember I remember late 90s when anyone put a dot com on anything they hoped to get a higher valuation. People are doing we did that. Yeah yeah it worked out for you.

[00:17:01] Taxes you didn't when you were the great exception to the rule that we just didn't do the real work. Exactly exact times you got to see it first.

[00:17:10] But there were there were lots of people who didn't. And so lots of people now are doing CEOs because they think it's an easy way to raise money as opposed to going through the JOBS Act or a regular IPO.

[00:17:20] You know Jim it just seems to me. Can you can anyone who has a lot of sophisticated investors in this room can you picture it coming out any other way create. I mean you never know. Right.

[00:17:31] Well there would be there would be great successes obviously and there will be lots and lots of people lose lots of money.

[00:17:38] Sounds like a lot of money will be stolen and a lot of will be a lot of fraud. So let's let's talk about just a couple of the big sort of stories.

[00:17:45] In your life that you've been part of Enron you caught on to Enron before Enron everyone knew the name Enron and how did just give us a little bit of a hint of how that was coming to be.

[00:17:55] I mean I've always said Enron. This is going to sound a lot. Enron was one of our easier shorts ever. I was basically tipped off on Enron. There was a column in the Texas Wall Street Journal back back in the day the Wall Street Journal used to have these regional editions and a friend from Dallas called me up and said you know you see this. Heard on the Street column by this guy John while John while full disclosure now works for me as an analyst and he wrote to her on the street about how the energy merchant banks were celebrating because they got a ruling from the FCC that they could use mark to model accounting often erroneously called mark to market accounting mark to model accounting to value these esoteric energy derivatives they were trading of which Enron was the 600 pound gorilla that. And so basically if Enron cut a deal with Intel to provide them power for 10 years in their Phoenix semiconductor fab. Enron was on the hook of finding the power delivering some fixed cost. Intel would pay them some premium to do that. And Enron was basically allowed to take an estimated future value of that stream. No matter what it might cost them and put it into profit immediately.

[00:19:17] Now this was not so few always understood their take on future earnings for capitalizing on the earnings environment that President accounting and propose but having no idea what power cost would be what that class would be.

[00:19:29] They just had to do one of these sort of the gotter sign off on that you signed off on that and so are there Otter's Enron. It never really matters. Arthur Andersen actually for them it did matter they went out of business like Pauly said in The Godfather won't be seeing him.

[00:19:43] No that's right. That's right. That's right. So and so but. So I read this and I started look at the company.

[00:19:52] I looked at their filings so the first thing I noticed was number one all the executives were leaving a huge number of senior executives had begun to depart in 1990 and 2000 and that's always one of our greatest red flags when you see wholesale executive departures at a company. Hold onto your wallet. We'll talk about a company where that's happening later I think number two in all these disclosures. And I had to read the 10k three times and I have to read a 10k three times to figure out how a company makes money. Again you've got to kind of be careful. But in the back of the footnotes were these odd footnotes they're in hiding in plain sight where entities with which Enron holds a general partnership stake in which a senior executive of Enron is the general partner or doing business and trading with Enron in a variety of securities and blah blah blah blah blah.

[00:20:47] How do you have that affiliate where senior executives ought to be Fastow the CFO was the general partner and they're buying and selling assets with Enron. It's hopelessly conflict what they were doing was they were putting their questionable investments in those vehicles and the ultimate fraud that came out later was that they had given a secret agreement with the buyers of those partnerships that if they lost money Enron would issue stock to make them good. And that is not to say that that was the fraud that was never disclosed.

[00:21:20] I mean it's it's amazing a footnote. So it's almost like leaving breadcrumbs and you get to go down.

[00:21:25] Well there was there was a great there was a great back and forth between Malcolm Gladwell and Joe Nocera to two great writers about whether Enron was a mystery or a puzzle in a puzzle. You have enough information to solve it the mystery you may never know. And that's kind of interesting. And I believe actually Enron was a bit of both. There was a lot you could have enough you could have found to make an investment case to be short. But there was a missing element that we didn't know until October of 2001 when it was disclosed that the buyers had a secret agreement.

[00:21:57] When you're when you're in a guy like you and you've you've got it right in a big way you should you just wait till the Antall goes to zero are you covering at any point in Enron's case.

[00:22:06] There was a couple of things we we covered in single digits so we started shorting the stock around 60. It went to 80 and then basically straight down. There was one great moment however in November of 2001 the company was clearly on the ropes.

[00:22:23] They had not filed yet and the stock was in the mid teens maybe low teens and the mid to company from across the street a company called Dionigi everybody kind of forgets us made a bid for Enron in the height of its height of its distress and Enron stock went from maybe 12 to 18 Dionigi which was the sort of Enron beat Team everything Enron did. They did later and worse. Their stock went from 20 to 30. And the view that they were getting a bargain and there were synergies and they could fire some people and blah blah blah.

[00:22:59] So we were listening to the conference call sort of stunned that this was even happening and someone asked the Dionigi CEO now. Are you comfortable with Enron's accounting. And he said I swear to God he said Well that's the good news.

[00:23:14] We looked at their books and their accounting is the same exact as ours. We actually went out and shorted made more money at Dionigi on the short side that I did at Enron. That and you went from 30 to 3.

[00:23:28] You call them what is called a dead cat bounce called Good luck and serendipity to its on her.

[00:23:36] So we spoke about this. I found this very interesting. You think there's a certain personality or you're born with an ability to short because you need you and your videos and you've been publicly saying for a long time you know it's Wall Street in America generally has an optimistic place as it should. Noise as it should be so you have an interesting strategy where you believe in the overall American story and capitalism and so you are here long the market as a whole but then you look for individual and brands or when you go in and tell me about the personnel you need to have to do that.

[00:24:11] So basically the ethos of why the firm was set up is sort of the reason we exist is that we believe that a good short portfolio meaning lots of bad stocks is the best way to finance your loans.

[00:24:24] And so the short positions liability on your balance sheet you guys are all smart and basically if it actually makes money. Think of Warren Buffett's Property Casualty portfolio. That actually throws off a surplus a combined ratio surplus. So if you could actually finance the Longs with a short portfolio that doesn't go up or as much as the market goes up you have a good deal. And that's that's really it the other day we have a variety of funds market neutral. 1 1990 which is our flagship and then short only we let the client decide where they think about the market a market agnostic. I'm focusing on my short ideas but as to what makes a good short sale I used to think that you could train someone on the short side that it was just a mirror image of going along to the same fundamental work. Lots of due diligence looked at the numbers you talked about the business plan and I don't think that anymore. And I think a lot of that's rooted in behavioral finance. In that studies have shown that most rational people have the ability to make the proper decision breaks down in an environment of negative reinforcement. So think about you know someone who's constantly being belittled at home are the ultimate example maybe a is an interrogation where you're willing to withhold information is broken down. If you think about Wall Street Wall Street is a giant positive reinforcement machine right.

[00:25:59] Everybody in this room by and large is the result of you know working hard as a kid going to school getting good grades you know going to probably a good school working hard getting a job and doing well making great entrepreneurial decisions right. So all of that is a positive reinforcement machine as it should be in the financial markets. Basically the noise you hear all day. I call it the Muzak of the investment world. Right. So when I wake up in the morning and look at my screen at five thirty six o'clock the first time we have 70 stocks were short globally a good 10 to 20 percent will have by rating reaffirm new buy recommendation. Earnings estimates raise 3 percent. Merrill Lynch CEO on CNBC. Takeover rumors out of London. Whatever whatever it might be it is just noise. For the most part you've got to see it but it's noise and people on the long side just get used to it. That's just the nature of the beast.

[00:27:01] But if you where do you get these and what does that. What does the characteristics of the short the person who is capable of so that the good short seller I think has to have the ability to actually just drown that out and say I've done my work.

[00:27:17] He or she has done their work and it has the courage of their convictions based on their word even if it might be diametrically opposed with everybody else on the street as they like Enron. Everybody had a buy in so at that point you have to have that a billion. Not

[00:27:33] everybody has it. And basically I think when I see it I know it when I see it and the young analyst of mine or one of my students describe I'm really curious as way to describe what they look a certain way and act a certain way that they have no soul.

[00:27:49] Are they. I mean they're not chiseled. We know that they're not what you give us. Give us just a taste.

[00:27:55] So I the thing I see often is in research meetings or in interactions with my staff is if a stock is going everything works what stocks going your way. But the stock's going against a young analyst. They're terrified right. And we take that the partners generally make the recommendations in our firm and that's the kind of puts us apart were kind of top heavy but the team still the analysts still work as a staff and they get kind of wrapped up in the idea as well. And when something's not working and the analyst comes in to me and says there's a new development and I need to know. I don't care about where the stocks go I need to know the news so I can make the decision. But but when they come in they're just terrified of stocks going against them going against the firm. And I just see that they begin to doubt when they begin to see when they're there they begin to doubt the idea. I know they'll never be a portfolio manager. They might still be a great analyst enjoys gets to them the noise gets to them. So the really good ones are like yeah they all say that but we've done this work and we know that's not right.

[00:29:01] So that's what I want I know that maybe they have a sergeant Friday from Dragnet would be a good choice. The facts and want the facts.

[00:29:09] I think Charlie Sergeant Friday would be a very good choice Alex like a lot of younger people here. No idea where you can go look it up on YouTube go look at the data right. The Dan Ackroyd version of the Web. That's right. We're really old.

[00:29:21] Yeah that's true. But you're. Well anyway mark here. So Bobby Axelrod on billions knows how many people here watch that show. So he is a good idea to hand off a psychiatrist. I mean yes in your business.

[00:29:38] I am fascinated by this. I think there are firms that have office like I had my budgets just not that big I the short side Denso you know so we don't we don't have office psychiatrists.

[00:29:52] I have I ran that idea about a couple of our guys and said we're on a sedan panel not just. OK. So we scrapped the idea. So talk to us about your feeling overall today in the marketplace. We have a Dow and I don't follow the market daily but I hear the noise myself. Yeah. Jones at record highs s hit record highs. I'll start your overall view. Are we in another. Bubble. But are extreme high right now multiple of earnings is at an all time high.

[00:30:26] It's the media it is the media the media's but the the the mean is still the peak was 1992 thousand but the median equity is probably as pricey as it's ever been. Now rates are as low as they've ever been. Right. So my investing history I got on the street 1980 started my funny five basically interest rates have gone from 14 percent to zero.

[00:30:49] That's not could be replicated again. I don't think that that is a once in a lifetime once in a generation drop in rates and interest for that I'm sorry your argument just why does interest.

[00:31:02] Why do you feel interest rates affect. How does it affect the monopolar.

[00:31:07] Well again I mean it should affect all things being equal lower rates should give you a higher cap rate give you a lower cap rates use real estate term but basically a higher multiple of earnings. The problem of course is when you get very very low rates you may have more deflation. And so future growth might not be there. But all things being equal no. Very few times are all things equal. However this one sit a generation when I started the keep you know McDonald's has a seven times earnings growing at 20 percent a year right now if you're growing 20 percent a year you're at 40 times earnings.

[00:31:45] And so the ability to buy great companies that were compounding at deeply discounted prices is long gone. And so we don't have a margin of safety any more we have a margin of error. And so in terms of our of our opportunity set in our global fund you know we were big China bears in 2010 for the next sort of four or five years of that.

[00:32:07] But in the past few years some of pandas that caught your time in China the economic system in either country as a whole I know people think about panda bears. NO NO NO NO NO NO NO NO NO NO NO. Those are rodents anyway. There are. Rodents Yeah. Anyway I figure if anyone's you know that pears as you say that. Yeah but.

[00:32:32] So in any case but in the past few years we're actually now we've reduced our China short and our global fund to the lowest it's been because we're seeing most of the opportunities in the United States on the short side.

[00:32:45] And so let's let's talk about a couple of industries that I've heard you talk about. We talked about fracking is an issue here for a lot of reasons accounting you're talking about that the U.S. health markets. You're worried about deflation aren't you.

[00:33:03] I'm worried that that health care the U.S. health care economy which is the largest sectors but 18 percent of GDP for the first time ever is going to be facing deflation going forward. And why is that. A lot of reasons. First of all I think the days. Well first of all let me step back the ACA Obamacare was one of the greatest windfalls for the U.S. healthcare industry ever. I always joke that the one group you never hear about complaining about Obamacare repealing Obamacare is the health care industry because you look at health care stocks and profitability it's done nothing but shoot up since 2010. Those days are over. They're over for a lot of reasons not least of which is that the U.S. government is finally basically getting to a point where they're going to offload a lot of the responsibility back to the states. The former Medicaid block grants the new budget actually cuts health care expenditures for the first time as they cut the growth they've got no cut taxes absolute cut. Cutting dollars for the first time in a lot of people haven't figured that out yet. And then finally getting the most important thing for people in this room and other is the employer based system which is still 50 percent of all covered lives in this country has really dramatically changed since Obamacare and we've gone to basically companies paying for 90 to 99 percent of your care to much higher copays and deductibles for employees. And I know my firm even though we have a platinum plan for my employees we've gone from a ten dollar 15 dollar copay at the pharmacy to 20 percent.

[00:34:45] And so for lots of reasons lots of households now in the last handful of years have begun to grapple with the idea that they're actually beginning to pay out of pocket. Now big amounts of their health care costs and they're beginning to realize how expensive some of this stuff is.

[00:35:00] They never did before. And you think it's going to by the virtue of the fact that millions of consumers tens of millions hundreds of millions are cognizant of it.

[00:35:09] I think I think that in fact usage will go down.

[00:35:12] I think they're going to go after some of the rent seekers some of the most egregious which were short companies that are overcharging people where this is now coming to light the guys.

[00:35:23] You know one company we're short Mallinckrodt which I've talked about publicly makes all their money basically from a compound called Akhdar just got to tell you this because it's worth hearing X that it was purchased by a company called Questcor a number of years ago for four hundred thousand dollars. They bought the rights act was a basically steroidal like cortisone. It was only indicated for one thing. Infantile spasms back in the 50s. It's now used for migraine headaches tennis elbow lower back pain. Basically lots of things that cortisone will be used for Act that was forty dollars a dose in 2001 when Questcor bought it for 400000 dollars. They raised the price to 4000 dollars a dose. Mallinckrodt came in and bought Questcor for 6 billion dollars plus in 2014 and it's now hiked the price to forty four thousand dollars a dose. This is according does it under patent. It's under patent but but the journal American medicine put a paper out this summer saying Who are the doctors who are prescribing this. This is basically outrageous. Now why is this import. It's the fifth largest drug in terms expenditure on Medicare. So we're paying for all this. It's also driving up. You know private pay costs. There's only a handful of doctors to prescribing this. Well why are they getting kickbacks. We're going to find out. But this kind of stuff. There's tons of it going on in the health care economy. And I think as as the dollars get tighter as the Pied us it expand but shrinks.

[00:37:05] We're going to be looking for more and more bad actors like this to basically say OK no. And I've often said that over the past 20 years in health care providers have found in more and more innovative ways to get paid like they are. And I think going forward the payers are going to find more and more innovative ways to not pay for this stuff. How about just a quick and big data when it comes to how we like we even notice now with our employees we can tell.

[00:37:39] Based on what someone goes on short term disability like on a Saturday. You know that means there's an 82 percent chance this person is going to quit in the next three weeks. They take all the benefits before that there's all these things you just see which is that going to affect things.

[00:37:54] My daughter is actually getting her master's at Imperial College in London in health care policy. And I just saw her recently. She came back home to visit and she said Dad all we're doing is taking big data and finding ways to make make it to cut costs and health care. That's her that's her program. So it's coming. It's already here but it's it's coming in the U.S. system. I mean the U.S. system is kind of the worst of all worlds and a health care provider because we have a government that pays our bills basically no questions asked. Right. Fee for service Medicare Part D by law means we can't negotiate drug prices like their insanity right.

[00:38:33] I mean that's just nuts. No one can run a business that way. You can do commonsense thing that would increase outcomes increase health better health at lower prices. And by the way the rest of the industrialized world is free freeloading on us because they pay marginal cost we pay marginal cost plus are in the plus marketing.

[00:38:53] I always wondered if if you see 80 years ago companies gave all their employees food cards those to health cards. Right. Food was provided you went and you get food for free. Now all of a sudden we announced no more. We're going to cut the free market on food and everybody in the street saying we're all going to starve people are going to starve. Well we all know what happened. I mean it's one of us capitalists things ever. Are you going to grocery to me when I when I walk into a grocery market. Very big ones. I think it's like the biggest miracle ever. Like in food this fresh from everywhere around the world you know the price of milk.

[00:39:26] It's unreal. We have to be a little careful though Dan because we don't shop for health care the same way. Exactly because there are these gatekeepers like our doctors or the systems. Yeah. And so so if a doctor says you need x you're not because well wait I'm not going to go to Washington. I'm going to go to Oregon and see if I can get X at a cheaper price. Are you going to. Your choices are limited to regional or local and you're being told because you don't have enough medical education obviously what you need to do. And so we don't the the consumer side of it is it's challenge for lots of reasons. And that's that's the trouble with the total free market solutions in health care. We don't shop for it the same way. You know it's unfortunately.

[00:40:06] Let's move on to another American car companies. This is a town and city. Yeah. So there's a company called Tesla. And actually we had you know we have a test on our phone it's my wife's car medallion once in a while I get it. It's a very fast golf cart.

[00:40:22] It's not your primary vehicle though is it a third car. Yes. Well for you it's by your third car.

[00:40:28] Now all American cars here in Detroit. I mean you know what. And I've got a little nauseous because when you get really fat like 0 6 whatever it is but there's no engine sound and there's no gear. So it's like you're on a roller coaster. Whoosh. Yes. It's a little creepy. So give us your thoughts. This is guy know this guy's he's easy. You know he's he's he's an icon for this bull market. And he's in he is he's he's building cars in an automated vehicle that's going to turn into soon and he's got space stuff going on. I don't want to go to Mars. That's his goal. I mean I thought mars sucks. I mean you look at Mars. I mean it is like negative energy. There's nothing there it's just red stone. Why do we want to go to Mars and we'll get into that little. So talk to us about Tesla. You're not you're not you're I'm not a fan.

[00:41:16] No I'm not offended so you know Tesla up to me every once every bull market has sort of its poster children for the bull market both good and bad. And I believe Tesla is one of the bad ones for this market. And the reason for that is is that that Elon Musk has succeeded in a public vehicle to keep selling a dream.

[00:41:39] And when the dream kind of becomes a little bit mundane he sells you the next dream but he's raising lots and lots of money. This is not an Amazon. This is this is a company that's in a capital intensive business. Auto OEM no matter what he tells you and is struggling and they lose money selling 100000 dollar vehicles. They're having problems getting the mid priced vehicle out and it's not been priced it's actually closer to 60 thousand dollars. As as as you can order the Model 3 today and of course the response now is to tell you who's got a semi coming out in 2019 and a roadster coming out in 2020. Both of those I believe are not true in my opinion he would have to have the production lines already approved for those they're not approved anywhere that we can find. So it's very doubtful he's going to have that semi out in 2019 yet he's out raising money both in the form of deposits and most likely a future stock or bond offering on those those sorts of promises.

[00:42:40] And is he right with your 300 dollars a share. Yeah. Why isn't he raising equity all the time.

[00:42:46] I don't know what he will be I think.

[00:42:47] And then finally you get stuff like the SolarCity acquisition which is really really was unbelievably bad corporate governance. So he owned a big chunk of SolarCity we were short so city our city was going bankrupt the model of rooftop solar leasing is moved on to distributed solar. They they they got the market wrong. The stock was plummeting the bonds were yielding over 20 percent. And out of the blue he decides that testo should buy solar city for 8 billion dollars and assume debt and stock. For those of you that are financial people SolarCity at the time was losing three hundred million dollars and negative it a year before the debt service and depreciation. And he basically saved. You know he saved his own equity investment by having Tesla buy him out which I just think is abhorrent and was how did the board the board approved it and the shareholders approved it. And you know without much of a blink because he controls the board and b the shareholders believe you know pretty much anything he tells them. And that to us was sort of a real sign that this thing had taken a dark turn. Now I mentioned to you the Enron executive departures we keep a list of the Tesla executive departures that we've seen. He hasn't disclosed them but we find them via LinkedIn and people send us. And it's a spreadsheet now that goes a full two pages. Over the past couple of years of all the senior people that have left Tesla they've got their son what's happened and obviously went out there's something wrong there.

[00:44:21] And you know on top of that you look at the accounting. And then finally my own prediction based on nothing more than seeing guys like this operate. I think he's going to leave Tesla within a couple of years. So I think he's going to move over space x percent Tiziana Tesla. He has says victory is reasonable. Wow that's about.

[00:44:44] Ten billion dollars.

[00:44:45] When he says he's selling stocks he knows he's family is he's not. Although he cashed out some of his foundation a year or so ago. But I think he will start selling stuff once he becomes the non-executive chairman. And my own view is he'll just sort of leave it to his number two and he'll be able to say later it was fine when I left it you know but if you look at the latest Rolling Stone cover story of him a month ago is that magazine still rolling stone.

[00:45:12] It's not online only you can get it online. You don't buy them. I remember you bought used to buy at Michigan State you the like. But we also we also bought a magazine. OK Robert you probably read it when Rob Report.

[00:45:24] Well I can't afford that stuff. It's as great aspirational I. So if you go if you go online or go to go to the head shops or wherever you can get rolling stone I don't know that that's the cover story. All the glossy photos are him at X not a Tesla him with a space helmet him on top of like a centerfold on top of a rocket. And that was very telling to me that if you go inside there all rocket. They're all rock.

[00:45:53] And I think he's getting I think he's getting the world ready for a lateral move over a Space X his dream is to go to Mars. I think Tesla is heading for a brick wall. I think that makes a lot of just dough. I've seen guys like this before. He's going to hit the parachute before before the shareholders do before he hits her.

[00:46:12] Hopefully I have to her and we were I think we're down to a minute or so yeah. Q and A session right. You know I noticed one comment and just to question the comment I noticed is I've had the luxury or the honor of also interviewing the sort of I guess them in the other side to you but that would be Warren Buffett and these kinds of interviews. But what I noticed is you guys are basically the same. I mean the way you're you do the work you're doing the work. You can hear it every night it's coming out doing the work going deep deep deep. And you stick to your mind you're ignoring the norm sort of pushing things aside and sticking to that much different between a hundred billion dollars. Oh yeah yeah yeah.

[00:46:53] Yeah. Sooner or later that adds up again.

[00:46:56] So the other quick question and I meant to ask this earlier and this is this to me is just something doesn't fit with this in the markets is it. Why are we at all time highs. Everything and we have the least amount of IPO and people going public. Is question. I mean that really is something that right.

[00:47:16] So I think though a lot of it has to do with the fact that the private markets have gotten very robust and so so founders and venture capitalists and things like we work and Uber and all these these unicorns really can combine now and sell shares in these liquid private markets. So that that's helped. And I think that a lot of them just simply because of that because they have the liquidity events now in the private markets. That was the allure right. They didn't want the public. They don't want to file they don't want to deal with people like me. And so why not stay private as long as they can keep getting funded. And that's that aren't they under pressure.

[00:47:57] I mean a lot of your venture capital cities like that come in. I mean you're right for most of it.

[00:48:03] Let's get you public right and get out right now. But now if I'm Kleiner Perkins Softbank will buy my stake right. I don't have to file it right. I've got Alibaba will buy my stake or there's all these big buyers now these pools of capital sovereign wealth funds who will actually instead of the public they become kind of a dare I say it the money and are buying the stakes for the venture and the executives. Softbank has a document out saying that they have a 300 year timeframe. If you read it it's almost gibberish. But you know people are like oh my God he's a visionary.

[00:48:39] And so let's go read it it's out of line.

[00:48:44] I urge you read the SoftBank sort of statement and then from my only son and told me it's not uber 300 at 1717.

[00:48:54] I'm trying to figure out years ago. Right. 1717 Yeah. And that's like that's like 40 years before Washington was born. Yeah it's a long time.

[00:49:03] Yes. Can you a few here and forks of the road. That one right.

[00:49:08] Yeah that's so.

[00:49:11] So they found buyers. And so who needs who needs the sort of scrutiny that public companies get if you get the liquidity in the private markets and you can stay stay private.

[00:49:22] Do you think you think removing Dodd Frank and making it easier I mean I'll just tell you from our own experience of whether or not our flagship we would have I wouldn't even like fathom that thought we don't have the thought of going public for that reason that reason only. Why would you want to waste everybody's time if you don't need to.

[00:49:39] Why would you. And so I think that you think that I mean I can't speak for most of the debt markets have got easier for private companies to access that may not make them not business but it would put larger companies.

[00:49:52] And so I think there's there's a fair amount of reasoning. And then of course the public money is burning a hole in their pocket so they've discovered Bitcoin. So we've got the outlet there.

[00:50:02] So just wanted to let's put Zeri at the Q and A session here.

[00:50:08] You know what do you say when people say to you about the shorts I did it you and you had a great answer. Yeah but what about Amazon. Everyone said yeah let's Intel the different graphics.

[00:50:20] So I started out on Wall Street I was in investment banking in Chicago and I was at Blighty's been PaineWebber our biggest account was McDonald's. So I did a junior guy immersed myself in the history of McDonald's and by the way if you haven't seen the movie The Founder go see it it's really a good business movie and it covers some of what made McDonald's unique which was McDonald's figured out the realty model in the real estate business not the hamburger business. And for years in the 70s and 80s any consumer company that was kind of getting some growth it looked like it could be this monster company. People say it's the next McDonald's and I always used to say you know Gumble I'm there. There was no next McDonald's. And nowadays when you get confronted with that sort of questionable business model like like a Tesla or whatever we can sort of model out it just doesn't work right. There are car company loses money. Some someone say yeah but you could have said that about Amazon and get that all the time. And so I decided to look back at Amazon and I remembered it from the late 90s. But I went back and recently just did a deep dive into the history financial history of Amazon and what I found was the following. Amazon went public in 1997. Their last public offering was in 2001. They've been free cash flow positive every single year since 2001. But the really intriguing thing was until 2012 when they got into the U.S. The basically the cloud they had no capital in their business.

[00:51:50] Quite literally we finance them through their retail model that if you bought books or clothes whatever you paid them upfront and they paid their suppliers in 30 or 60 or 90 or 180 days and basically like Dell Computer that financed their plant equipment. And so for years Amazon really didn't make any money. But I kept saying they don't have any cap on the business. Right it's the ultimate efficient machine. Once they started investing in a WS and more more growth they started making a profit. The money followed the investment and I know that's one of your dictums.

[00:52:26] And so there really isn't been a business model like this. Alibaba doesn't have this business model. EBay doesn't have this business model and so there is no next to Amazon. And for someone to say that a Tesla which is capital intensive tons of debt raises stock and bond offerings every three to six months.

[00:52:48] As a guy who is going to tomorrow a guy going to Mars. Yeah. And by the way Bezos has too. Interestingly enough he's got his own rocket company. So it was unique animal. And same with Apple.

[00:53:02] People have said that about Apple. Well no Apple has 40 percent gross margins in the consumer products business. And in Tesla's gross margins are 18 percent.

[00:53:14] And so you know down the line. The problem is a lot of these statements don't hold up when you actually go back and analyze and understand what made Amazon unique you realize it was unique and that for everyone to say I'm going to justify any valuations 60 billion dollars and Tessler whatever it might be because it's the next Amazon.

[00:53:36] Good luck.

[00:53:37] Schachter Well I understand a Shuckers name just a Shecter is that accurate. Schachter This Shechter that changes just Shechter sort of like Madonna Cher Sting Eminem covers it all but you guys I mean you know I would like to just thank you for bringing something like Jim here and I think he does great stuff. And thank you for connecting. That's just from. That one last thing here. And I guess we're going to some Q and A. We came up with the name. Together we brainstormed what we came up with the name. For Jim's autobiography or could be just biography that writes I'll let you tell her what is going to be called.

[00:54:18] Life's too short so I will give him a credit the knowledge of when we read the book with third bag said it was that's been on the way out.

[00:54:26] You guys we do have these are normally 1999 plus shipping and handling but this is our culture books and by the way is the last time we're ever given out the 2017 edition 2000 18 come out and you literally there on ebay I swear to god they go up in value. So you know check it out. So we're going to get to you.

[00:54:46] Q and A's for the remainder of this year.

[00:54:49] Oh wait before we have 30 seconds to play that clip. 30 seconds. You got it. The 30 second clip. You don't want to see it. Sorry I blue it I got a note here. Now that's my.

[00:55:27] Table. I never called out.

[00:55:30] The most powerful company in the energy sector as a father and my son. There's a lot of fun.

[00:55:39] A lot of those guys were the guys that were there you just sort of saw that they were all professional poker players. Brian Koppelman who is one of the creators is a big poker player. He did it his first movie was called Rounder's which a lot of people know. Ed Norton and Matt Damon as the sort of underground poker scene in New York. So he was dying to do a poker poker scene and that was that I think could be a supporting actor.

[00:56:04] Let's not go that far.

[00:56:06] OK great. So before we get to some questions I just want to share that. You know when we met Jim back in April besides being impressed with his brilliance and tons of knowledge we asked him to think he knows a lot. Of. It was really his. You know we walked into his office thought maybe we'd have you know 15 20 minutes to kind of meet him and talk to him and after an hour of talking about Mark Felt rich and Detroit asking that question our businesses our families. We really built a nice relationship with him and we felt that he was just a real down to earth Midwestern values guy and we thought it would be great for all of you guys to come and share a little piece of you. Well. Thanks. For this. Q And a section here. We thought it would only be fitting if Jim or his groats of God go anywhere the way Winthrop churches which doesn't exist anymore. Oh my god I need a rest in peace. I got myself a literature.

[00:57:14] Okay I'll kick it out. So really interesting and thanks for being here you're going to talk about who you are.

[00:57:21] I'm Jerry Anderson the CEO of Energy Energy Company N10 and we have a trading company an energy trading company ended in 2001. And so we were you know a lot of transactions with Enron everybody was everybody was in the market. And remember what you were talking about very well but we had I heard a new Internet that trading company about eight months before they finally toppled and he got us out because he hired one of these didn't hire. He looked at hiring one of these departing executives. And he dug in when he found out he's the guy who was sent to fix the Midwest found out that the problem was that new accounts receivable funds were Mark and these deals weren't collecting the cash and yet he called me and said if that's the state of affairs we get eggs and everything. So question for you is you've got this list now. Tesla departing execs do you ever get.

[00:58:19] The opportunity of conversations with Tesla execs and it was so we're very careful to people we tried not to talk to. And it was on the front page of The Wall Street Journal back in 0 6. The the intelligent networks of ex executives and experts we began to worry about that because you always don't want to get material non-public information which you can still get from A depart or departed exec and never wanted one of my analysts who wouldn't know better to get in on the conversation and find out something they shouldn't. And in effect we're still trading on it right. That that's just a no no. And so we stopped all our relationships with the with the third party network. And that's still kind of a big business. But we just always worry about that. And so the same thing with with former executives. I don't want to initiate a conversation with a former executive and find out something I shouldn't that's material and non-public if it's public if it's out there on LinkedIn or we can find somebody has left the company. That's all well and good but I don't want him telling me something or her telling me something that I shouldn't know so ex execs are considered a source of that they can be.

[00:59:33] Yeah it depends what they tell you. And what I don't want to be is in a conversation with someone and they're fine telling me all this stuff and then they cross a bright line and say oh and I knew of some fraud inside the accounts receivable. Like I'm restricted in the stock I can't trade on it and I never want to put my clients in that position.

[00:59:52] So we're pretty careful on that and we avoid that same thing. Just a corollary we don't voluntarily share our stuff with regulators or law enforcement. Now that might surprise you but I view I'm not in law enforcement that's not my role. Right. If they approach me and want to know what we know about Balliett pharmaceuticals or Enron or whatever. I'm happy to tell them. But I don't want to be initiating any kind of regulatory investigation or law enforcement.

[01:00:22] That's not my role. That's not my client so it's something it's something that you have to be careful about and say we never and I never inadvertently want one of my staff to be put in that position.

[01:00:33] And it just it's not worth it. And that's how many people have questions so we can balance timing here. Great to see you about six seven. OK. Well because he's my brother. I'll pick Greg came in all the way from Seattle for this. What do you got there right here.

[01:00:56] Short selling when I buy stock long I just hang on to it. If I wanted to short lived to have to choose a time frame. No no. So here's how you deal with that.

[01:01:09] Now unless you're buying showbag opt put options. Now there's a short positions open ended its short a short position is actually seen as the IRS as an indebtedness I'm borrowing money and so it's why actually short sellers have never gotten capital gains treatment on their gains. So the IRS looks at it as a commercial transaction.

[01:01:28] So assuming it's a big liquid stocks like Tesla or which is a big liquid Sagra IBM or whatever it may be theoretically the short position is open ended in terms of timing just you know technically because when something explains me five years ago I seemed like wow you own 100 shares of Microsoft Microsoft would want to stay there and you got your like hey I borrow your shares from you and I sell them to general. Right now I owe you the shares back when I get it back has gone into the market and buy if I buy it lower. Right now the shares are giving back to you. I mean that's a technical definition of shorting right now. I'll get it and I get there right. Right.

[01:02:07] You got it. But that's I'll give you what I'll give you when a little little bit inside baseball curveball.

[01:02:12] However a lot of people think that actually that you can only short the number of shares that would be in the float. That's not true. The same share could be shorted over and over and over again assuming the buyer puts it back in a margin account. And so what has to happen when you buy 100 shares of Microsoft selling to me. There's now 200 shares long and 100 shares short. The net number is still 100. But the gross number is inflated. So you could have a very speculative stock a short position that's multiples of the float and people don't get that and the technical definition of a squeeze.

[01:02:51] He asked for his stock back to go sell it.

[01:02:53] And I can't borrow it somewhere else so actually I'm forced to go to the market to return the loan. But that happens very rarely these days. Q.

[01:03:04] I'd like to ask you Jim about something modeled that you see here in Detroit for the other car companies. Yeah you know we're. We understand the Tesla model but we have a lot of you know heavily capitalized fixed asset company and there they need to fund billions of new product new developments. What do you think of that.

[01:03:32] So I started with the Detroit story do I have time for Detroit. I'll take I'll take you back to 1975 in Detroit and this is this is I was telling last night at dinner I was telling this story and it's still kind of gives me chills when I tell this story.

[01:03:49] A good friend of mine my best friend in high school his father was an engineer at GM and one of the divisions I think it was Oldsmobile might have been Buick anyway. Greek Americk a Greek guy. University of Michigan grad worked his way up post World War II through GM. Been there forever and I was having dinner at his house and he was looking at his son and me. What are you boys going to do when you go to college after you go to college. I thought I was gonna be a doctor. I hope Mr.. I'm going to be a doctor and his son want to be a lawyer. Anyway he said Good. He said don't go into the car business. Why not. He said I'll never forget this he said. We just took apart. I believe it was a Kuryla a Toyota Corolla. We can't make that car for twice the price. Never forget that it was Detroit kind of at its peak in terms of the auto industry and they kind of knew right. They knew that they were facing competition and it was cheaper labor but the quality was getting better. And that was the turning point. So Detroit has changed from I've looked at GM I've looked at Ford spend as much time with Chrysler and at post bankruptcy post 0 8 0 9 and post the climate obligations which were restructured 05 06.

[01:05:10] The industry has changed dramatically financially. I also think they seem to be a lot more nimble right now. Tesla is at level 2 autonomy in their software. GM is about to go to Level 3 Audi's at level 3 now and Google through Whammo is at level 4. So Tesla is actually one of the laggards in autonomy. Detroit and Germany are ahead of it. So for all the talk about technology whatever you have to understand that Detroit and the Japanese and the Germans are throwing tens of billions of dollars into autonomy into mobility projects and into Evie's. So this is you know they're they're every bit as cutting edge as Tesla if not more so.

[01:05:54] Gina if I could add to that people don't know this and I think we've under the sun. This is a marketplace. It's the capital of the world not time and time. It is not just the hardware the software anymore. You know Google and wanelo just opened up a big office here. They're kind of it's not Silicon Valley it's here now it's here and it's going to become more and more here. And we're optimistic.

[01:06:13] I mean Tesla has sold a great story about this but the actual innovation is happening here in Germany.

[01:06:20] And so I think that I think that again Detroit's better position for that than they were in the 70s changed in the 90s changeovers. I think they see it coming and they're going to try to get front of it. Porsche from a German party. Portieres got the mission coming out in January 19. That's an eighty five thousand dollar car that has been designed ground up as an Evvy and will charge twice as fast as a Tesla Model S. You have to get a new one. And and and we'll go zero to 60 in two sites. You know whatever. It's gorgeous. And so all this stuff that came out of their Le Monde's effort. All these companies now have seen what Elaine did.

[01:07:08] I like to point out that what you did was was simple he made sexy. He made them aspirational. Prior to that you had to compromise to be to be green. Right. You had a little bug and Prius or whatever. And you know you felt good but it was a bug. And he made the model S this sexy aspirational car that Dan wants to drive.

[01:07:30] Now it's sexy to be nauseous when it's so so and that's great.

[01:07:35] And he did that. He again that's what he got right. But now he's got the entire automotive world figured that out and coming up. There are entire lines and miss stuff like the mission the ground up making aspirational cars and now he's fighting a different fight.

[01:07:51] Phil here.

[01:07:58] So I was at Guilford Guilford actually made me the shorts because I went from investment banking and I joined this little shop in Chicago called Gilford Securities. To become a research analyst in early 1982 and the very first company they asked me to look at was a company called Baldwin United which was the old Baldwin Piano Company good Midwestern company Cincinnati. And

[01:08:23] it was a complete and utter fraud. It had morphed into financial services was selling annuities and booking this crazy accounting on them end up going bankrupt in 83 was the largest financial service bankrupted bankruptcy in U.S. history. At that time my boss the partner in Chicago we had all of this information we documented everything. We've gotten files from the state of Arkansas. We could prove the fraud and the stock of course doubled on us and the New York partner wanted to fire me and the Chicago partner you know said we're not fighting this kid I'm putting my reputation on the line. I've seen the work. We're going to stay with it. And that could have been the end of my career right there. And a guy Bob Holmes you know went to bat for me and I'm forever grateful. And it was a very first research report ever wrote turned out to be a giant fraud. You

[01:09:17] couldn't get any short even wrong on the colossal I in a big way. Yeah

[01:09:23] the biggest the biggest one we got wrong price wise and sort of reputation he was we were famously short America Online. From the late 90s and basically started shorting it around ten dollars I think we covered last year at about 80. I'll get your attention right. And then time Warner bought them at the equivalent of 100. It was the accounting story. I don't know if you guys remember this. I know Dan does. But remember all those disks you used to give out the check out you know CDs of America Online.

[01:09:57] Well they are capitalizing on those costs and they were expensing them and basically their churn was a lot higher than they were letting on. So if you did the numbers you kind of realized even in 1995 a month they probably were never going to make money out of subscribers and they were playing all kinds of other accounting games with barter transaction or whatever. Nobody. It didn't matter. And so there was a point about risk management. AOL was never much more than a half a percent or 1 percent position even on the way up. So it cost us six or seven or eight percent over three four years. It was not a killer but we look pretty dumb. And then of course we covered.

[01:10:35] Time Warner bought them what we should have done it been short time Warner but little Tim Armstrong who is the CEO of AOL talked to Yep and we were talking and he there's a 180 to 200 thousand people in United States they still page still here.

[01:10:52] Yeah yeah I might ask why because I have no idea what that means. It's the power of the negative check off business right.

[01:11:00] Once they get you you kind of forget about it.

[01:11:03] Great question over here.

[01:11:06] So for 17 years sort of this and he talks a lot about going through like the company's balance sheets and stuff like that. The core business. How important is technical indicators like. Implied Volatility momentum in that broader market indices. You know maybe maybe makes you wait six months or something before you actually step aside.

[01:11:27] Yeah. So a paraphrase Will Rogers said basically you know basically our whole view on that is the only short stocks that go down if they're not going to go down don't be short term right.

[01:11:38] So you know all these things are helpful. But I found technical analysis to be incredibly helpful using hindsight. It has not been helpful for us on a predictive basis I've had stocks with breakouts that you would have said oh you going to cover and then the fraud gets announced. You know the frauds uncovered a month later and the stock collapses. So for us we use basically a percent of capital as a risk metric basically member for most of our accounts we're hedged long the market anyway. So you know for us. I'll take the idiosyncratic risk of the position. I don't care about the systematic risk of the market. That's my client's decision how they want to be positioned. So and again when you're short domestically 50 stocks or globally 70 stocks you're always going to have a few that are.

[01:12:34] Breaking out or whatever. And a few that are breaking down. But we found that by and large the ability of the immediate past price performance to predict the future is kind of a coin flip.

[01:12:49] Any other questions. Yes.

[01:12:53] Jim thank you very much for speaking. It was very interesting. Ken Fruehauf question you mentioned health care and maybe running innocent headwinds to find these ideas are you starting at a sector and then digging down because you also are also mentioned in kind of a laser focused on this story. Yeah for example the Wall Street Journal article on Enron. So do you how do you start and then how do you get to that point. If it is in fact sector that you're looking at to start what sectors looking for would you tend to think you're overvalued or so.

[01:13:27] That's a great question. And so how much of what we do is is is you know so-called top down and how much it bottoms up. Ideally it's all bottoms up. But what we have found historically is that a large amount of our Alph our excess performance is tied not only to stock performance but industry performance.

[01:13:48] That's just a reality we've looked at our numbers through 30 years. And so the reality was like the Dionigi Enron story gave you. Once we realized what was happening with Enron in their accounting and the structure of their their merchant banking up all of the energy merchant banks should have been shorted. Now we only shorted Dionigi and worked fine atop of Enron but the fact of the matter is they all went down 80 to 100 percent and the problem was specific to the industry. Much like the domestic oil and gas guys you know today in I will tell you in China we came at China because of the bottoms up. People say Oh you can get these views on China. She didn't really get into today. But but we start to look at China the fall of 0 9 it's a great story. Daniel appreciate it. And so I was trying to figure out how why the commodity guys the miners copper miners iron ore why they were all reporting record profits in the teeth of the global crisis. Now I knew the answer was China but I just kind of didn't know to the extent that we were sitting in our conference room and my real estate analyst was putting some numbers up at the white board and he said currently in China this was November of 09 that currently are currently in China. There's five point six billion square meters of high rise space under development half office and mixed use half residential. And it kind of looked at them and said oh wait Alex you're making a rookie mistake you're making the metric conversion.

[01:15:20] It can't be five point six billion square meters. It's five point six million square feet. Because five point six billion square meters is almost 60 billion square feet. And he looked at me with fear in his eyes as young as he goes I triple checked the numbers is five point six billion square meters. And I thought for a second I said well half of that's office space that's 30 billion square feet. It's currently under development. That's a five foot by five foot office cubicle for every man woman and child in China. Now you know why they lifted that birth restriction. And so it's like you know and I had been sure the commercial real estate bubble of the late 80s when they changed the tax law and we were short some of the credit companies in 0 5 0 6 0 7. But like that the light bulb went on and like wait a minute what. And then we started doing a deep dive on the credit figures the economy an economic model and we suddenly realized there's never been a real estate bubble or credit bubble like we have today in China. Never. Not Japan not Spain not the U.S.. Never. This is unprecedented what they're doing over there. And so that led us to all kinds of other things. But it started with bottoms up and in healthcare just to finish your your question. We started looking at a variety of health care companies after the ACA was passed. We thought that Obamacare would be. Bad for business. It was great for business.

[01:16:53] We realized that sort of early on but as time went on we began to look at more and more these models and the one that got us really interested was a company called Valley and pharmaceuticals which turned out to be the largest single hedge fund lost in history when it blew up in 15 and 16 and they were in this business of buying drugs and hiking the prices dramatically. And as we got into that we started looking at other guys and then we stumbled on all kinds of companies that were involved like Mallinckrodt and others that were involved in what I call the rent seeking behavior. And as we got deeper into that we started understanding reimbursement procedures and whatever we got a new administration and was not a political thing but clearly new administration new Congress which had completely different views. And we're going to begin to restrict all this stuff and the more we've gotten into that the more we've realized that a lot of the health care economy now is really facing some serious risk.

[01:17:51] Take a few more questions before I do I just want to share. I haven't mentioned it yet today but Jim manages over about two and a half billion dollars of funds and his current fund long sword fund is up 26 percent year to date. He's outperformed significantly for the last 15 years. Typically as a two million dollar minimum and he has arranged with us to structure something in a way that we can take investments below 2 million.

[01:18:24] Yes. So again so what we're how do we change or show.

[01:18:38] By large again we get the client make that decision. So for lack of a better term we have kind of three pools short only where the client brings the long side to the party market neutral or what 1998 was basically our benchmark is the market itself. And the idea is I'm spending all my time on the short portfolio. The rest is financial engineering. Now having said that there's one little by little twist we found over the 32 years that are. Short alpha. Which is basically as lumpy. There's lots of years worth of nothing. And then there's a number of years where it explodes. The short Alpha itself is historically anyway has been a precursor to generally more difficult markets meaning when we suddenly start to outperform dramatically when stuff starts falling apart. Even though the market's going higher are churning. Usually that means the market's kind of in trouble and so we will do our weightings a little bit less wrong in our hedged vehicles. If and when that happens is that happening. No it's still and you're going to have that. Now it's still flays still flashing green. And so so for way you know and by the way it's missed some too but other than that and even that in the 1 1990 we mentally shaded 10 percent. I just I'm really I'm I'm fearful of trying to time markets. I think it's basically almost impossible you. The school of Warren Buffett has.

[01:20:16] Basically says if you're not going to do the work involved in doing the work and take the long term capacity you know buy an index fund.

[01:20:26] For most people that should be core. If people are doing interesting things like debt securities private placements where they can add value. I am a big believer and I sit on investment committee so I actually allocate capital to.

[01:20:38] But for the core part of your equity portfolio are your bond portfolio there should be some low fee get your exposure that way. And then if you find smart people that you like are doing something interesting that can be done and diversify your portfolio that can be fine and that can be part of a portfolio too.

[01:20:58] But for the most part if some guy is in a mutual fund who's by big cap large cap U.S. equity stocks he's charging you a 2 percent to do it that's what you would call renting rent seeking behavior. Yeah yeah. Because he's not going to beat the S&P by that much. And you're throwing money away.

[01:21:15] Absolutely. That starting this afternoon rent seeking behavior.

[01:21:19] Guy Yeah. I don't.

[01:21:31] That's good. That's what's made this country great actually.

[01:21:41] Well so. So I think the structure in our hedged vehicles which were long the market passively actually works on that because when people try to start picking stocks on their own they really do pretty miserably. Getting back to the last question. And quite frankly the indices themselves are dynamic great. The stuff that fails you never see because they kick it out. And so there's all kinds of studies have been done of people that buy and hold portfolios They've done terribly. The whole idea of the index is that you're constantly putting in the index the stuff that all that is succeeding. And so again the idea is most hedge funds do the opposite right. They try to pick stocks and then they hedge the market by going short the market. And. There's just too many smart people trying to do that right on the wrong side. We'd much rather go at it with the telescope on the other side and say OK hard to beat the market alongside. We're pretty decent at what we do in our little corner of the nefarious business models and executives and rent seekers in our world. Let's just have that our insurance policy and just be long America.

[01:22:50] Now there's actually a free market just crazy around here.

[01:22:54] It should. But if they can go on a long time it can go a long time.

[01:22:59] Tony you have a question before and it was different. So you.

[01:23:09] Ironically the magazine cover pictures space SpaceX and then you mention potential modifications. U.S. health care market just as the policy over those things are really analytical. Yeah right. Yeah I love to understand what a meeting looks like you set your mind to good question. You have to imagine a guy so.

[01:23:30] So again are our firms a little bit different as the guys. No because we're very top heavy partners actually generate most of the ideas when most hedge funds I don't get this they put the onus on the youngest most inexperienced people in the firm to come up with ideas that they pitched to the senior people like why would you do that right.

[01:23:50] Well first of all why would you waste your time because some stuff might not even be believable. We can't even short it. And for us it's much better that the top guys have been doing this for a long time. Part of the reason for that and your question about partners meeting is a good one in that. The process is not only analytical but with the people and I'm really proud of the fact that since the six of us have 170 years on the street over 128 calicoes partners it would be 25 years is that there's pattern recognition. And that's the stuff you can't teach because when we were looking at Valiant pharmaceutical's this roll up which turned out to be a great short idea for us. Of course it doubled first. By the way when we were talking about the idea we called it our analyst to walk us through some of the accounting the acquisition of counting to the partners all looked at each other and we said Tyco International. We had seen this before. We had seen this a very celebrated short of ours Tyco where the guys went to jail and we saw the way he played games with the role of accounting. And it was exactly the same at value. Exactly. And there that was from 16 years earlier. But the partners had pattern recognition whereas basically you've seen this movie before. And so then we dug deeper. That was for us a signal that something didn't seem right here. And let's go let's go. And it paid off.

[01:25:21] So what's interesting is literally what you're saying I have so much in stocks that we have these conversations. I mean B.S. like. That's it. That's the Smith movie from. Well it's also the secret sauce right. It's the same movie. Yeah I mean we use that term.

[01:25:37] Yeah it's I mean. But also it comes from a lot of work quite a lot of experience a lot of ideas and stuff that doesn't work and you know and you kind of remember OK I'm going to stay away from this.

[01:25:47] This short idea because I've also seen Fidan float total promotor come to guys are getting behind it. Let's just avoid this for a year or two and come back to it. So that's that's just experience and and often it's not right but more often it is. And you have to use that to supplement just the spreadsheets and the analytical work you've got to do that too. But but having some judgment having been through market cycles also helps. You know this fund was started in 85. So I've seen you know four or five roaring rip roaring bull markets and they're all little different but they all have also some similar characteristics.

[01:26:26] You know we got the hook. No no no. Jim is agreed. I believe to be here for a little while longer. So we want to journey out here shortly but I want to enjoy myself and Jason Zomer and Mark checked his brother in law and also Greg sectors and Greg Shechter Seattle. And we're really proud of you Greg. Thank you Dan and Jim. This has been we knew it would be entertaining and thought provoking and. You guys are great entertaining and Shecter. We want to also be entertaining sometimes but today we want to be informative and. We are trying to identify opportunities like djinns fund kinescopes. And it's just an honor to be up here talking to you guys. Dan you had a vision for Detroit. It's just plain to everybody here that we wouldn't be sitting down here if it wasn't for use of your vision not only Dr..

[01:27:29] I assume I assume that was for dad.

[01:27:32] Can I just say I just interject one thing. So the love of my life the one I've seen for the last eight years is currently finishing her economics degree at NYU and I told Dan so before we get out I was showing her some pictures in front of the Burner's machine at one of his little hideaways. The Shechter is actually got her addicted diverters by sending me this package about Michigan stuff. So that was the greatest thing ever. Native New Yorker anyway. Oh my god you're meeting Dan Gilbert. We're reading about him. You know when my urban econ class at NYU. This is a man that quite literally is making over a major city and that has not happened nice says Robert Moses. You know your urban history in New York in the 1940s 50s and 60s and it was like high praise. So I just thought I thought that that is. Just.

[01:28:29] I'm just thrilled you're not short Detroit. That's a number. No no no not at all. And number two mean we just have a great we have over 17000 full time people downtown now but we have great people some are here in the room. How many people are we thought we had some people back there some you know guys coming from the floor of the bank or flooring themselves or top bags and you know this was a pleasure. This is an honor and I think that I'm man when I talk to people like you what you are Warren Buffett. First of all number one the threat. What do you say pattern recognition are always just good people nice can explain things simply. And in a way that everybody understands what they're talking about. That's the common thread and I think it's just low. Thank you for having me.

[01:29:14] So Jim I also want to give you some props. You see things within company financials that that other people don't see and sometimes there are strong headwinds in your face and conventional wisdom. Like you said earlier tells you that you're wrong so your conviction to see those things through has earned you and your investors tremendous returns. And obviously we're not in any way trying to compare ourselves to you guys but we're investing with you our family. Greg you might not know this yet but we're going to be investing with Jim and depending upon the circumstances with you you can invest directly into Jim's fund or one of these vehicles that we were developing with GM which enables you to capitalize on some of the efficiencies of insurance products to shelter the tax. So this is our tiny tiny commercial so we'd like to invite you to join us for some hors d'oeuvres cocktails and more conversation. Thank you all for coming and braving the weather. Thanks.

I always used to say you know grumbling breath there there was no next McDonald's and nowadays when you get confronted with a sort of questionable the business model I got like a Tesla or whatever we can sort of model out it just doesn't work right their car company loses money someone say yeah but you could have said that about Amazon right I get that all the time and so I decided to look back at Amazon I remembered it from late 90s but I went back and recently just at a deep dive into the history financial history of Amazon and what I found was the following Amazon went public in 1997 their last public offering was in 2001

they've been free cash flow positive every single year since 2001 but the really intriguing thing was until 2012 when they got into the AWS though basically the cloud they had no capital in their business quite literally we financed them through their retail model that if you bought

I self doubt Jones at record highs s hit record highs. I'll let you know your overall view. I mean we enter another.

[00:00:08] Hour and we're bubble. Extreme high right now multiple of earnings is at an all time high.

[00:00:14] It's the media it is the media the media's and the mean is still the peak was 1992 thousand but the median equity is probably as pricey as it's ever been. Now rates are as low as they've ever been. Right so my investing history. I got on the street 1980 started my funny five. Basically interest rates have gone from 14 percent to zero. That's not could be replicated again. I don't think that that is a once in a lifetime once in a generation drop in rates and just for that I'm sorry your argument just why does interest.

[00:00:50] Why do you feel interest rates affect. How does it affect the monopolar.

[00:00:55] Well again I mean it should affect all things being equal lower rates should give you a higher cap rate give you a lower cap rates use real estate term but basically a higher multiple of earnings. The problem of course is when you get very very low rates you may have more deflation. And so future growth might not be there. But all things being equal now. Very few times are all things equal.

[00:01:19] However this one sit a generation when I started on the street you know McDonald's has seven times earnings growing at 20 percent a year right now if you're growing 20 percent a year you're at 40 times earnings. And so the ability to buy great companies that were compounding at deeply discounted prices is long gone. And so we don't have a margin of safety any more we have a margin of error. And so in terms of our of our opportunity set in our global fund you know we were big China bears in 2010. For the next four or five years of that.

[00:01:55] But in the past few years some of pandas that caught your time might be negative.

[00:01:59] China the economic system in the country as a whole I know people think about panda bears. NO NO NO NO NO NO NO NO NO NO NO. Those are rodents anyway. There are rodents. Yeah. Anyway I figure if anyone's you know that bears as you say. Yeah but. So in any case.

[00:02:23] But in the past few years we're actually now we've reduced our China short and our global fund to the lowest it's been because we're seeing most of the opportunities in the United States on the short side.

[00:02:33] And so let's let's talk about a couple of industries that I've heard you talk about and we talked about fracking is an issue here for a lot of reasons. Accounting you're talking about that the U.S. health markets. You're worried about deflation aren't you.

[00:02:51] I'm worried that the health care the U.S. health care economy which has been the largest sectors but 18 percent of GDP for the first time ever is going to be facing deflation going forward. And why is that. A lot of reasons. First of all I think the days. Well first of all let's step back the ACA Obamacare was one of the greatest windfalls for the U.S. healthcare industry ever. I always joke that the one group you never hear about complaining about Obamacare repealing Obamacare is the health care industry because if you look at health care stocks and profitability it's done nothing but shoot up since 2010. Those days are over. They're over for a lot of reasons not least of which is that the U.S. government is finally basically getting to a point where they're going to offload a lot of the responsibility back to the states in the form of Medicaid block grants. The new budget actually cuts health care expenditures for the first time they cut the growth they've got no cuts absolutely cut cutting dollars for the first time and a lot of people haven't figured that out yet. And then finally getting the most important thing for people in this room and the other is the employer based system which is still 50 percent of all covered lives in this country has really dramatically changed since Obamacare and we've gone to basically companies paying for 90 to 99 percent of your care to much higher copays and deductibles for employees. And I know my firm even though we have a platinum plan for my employees we've gone from a ten dollar 15 dollar copay pharmacy to 20 percent.

[00:04:33] And so for lots of reasons lots of households now in the last handful of years have begun to grapple with the idea that they're actually beginning to pay out of pocket. Now big amounts of their health care costs and they're beginning to realize how expensive some of this stuff is.

[00:04:48] They never did before. And you think it's going to fight the virtue of the fact that millions of consumers tens of millions hundreds of millions are cognizant of it.

[00:04:57] I think I think that in fact you will go down. I think they're going to go after some of the rent seekers some of the most egregious which were short companies that are overcharging people where this is now coming to light the guys. You know one company we're short Mallinckrodt which I've talked about publicly makes all their money basically from a compound called Akhdar just going to tell you this because it's worth hearing that it was purchased by a company called Questcor. A number of years ago for four hundred thousand dollars they bought the rights act it was a basically steroidal like cortisone. It was only indicated for one thing. Infantile spasms back in the 50s. It's now used for migraine headaches tennis elbow lower back pain. Basically lots of things that cortisone would be used for. There was 40 dollars a dose in 2001 when Questcor bought it for 400000 dollars. They raised the price to 4000 dollars a dose Mallinckrodt came in and bought Questcor for 6 billion dollars plus in 2014 and it's now hiked the price to forty four thousand dollars a dose. This is according does it under patent. It's under patent but but the journal American medicine put a paper out this summer saying Who are the doctors who are prescribing this. This is basically outrageous. Now why is this import. It's the fifth largest drug in terms expenditure on Medicare. So we're paying for all this. It's also driving up. You know private pay costs. There's only a handful of doctors to prescribing this. Well why are they getting kickbacks. We're going to find out.

[00:06:43] But this kind of stuff. There's tons of it going on in the health care economy. And I think as as the dollars get tighter as the Pied us it expand but shrinks we're going to be looking for more and more bad actors like this to basically say OK no. And I've often said that over the past 20 years in healthcare the providers have found in more and more innovative ways to get paid like they are. And I think going forward the payers are going to find more and more innovative ways to not pay for this stuff.

[00:07:18] How about just a quick. Big data when it comes to how we like we even notice now with our employees we can tell.

[00:07:27] Based on what or some of those in short term disability contracts for on a Saturday. You know that means there's an 82 percent chance this person is going to quit in the next three weeks. They take all the benefits before there's all these things you just see which is that going to affect things.

[00:07:42] My daughter is actually getting her master's at Imperial College in London in health care policy. And I just saw her recently. She came back home to visit and she said Dad all we're doing is taking big data and finding ways to make make it to cut costs and health care. That's her that's her program. So it's coming. It's already here but it's it's coming in the U.S. system. I mean the U.S. system was kind of the worst of all worlds and wished her a health care provider because we have a government that pays our bills basically no questions asked. Right. Fee for service Medicare Part D by law means we can't negotiate drug prices like their insanity right. That's just nuts. No one can run a business that way. You can do commonsense thing that would increase outcomes increase health better health at lower prices. And by the way the rest of the industrialized world is free freeloading on us because they pay marginal cost we pay marginal cost plus our D plus marketing.

[00:08:41] You know I always wondered if if you see 80 years ago companies gave all their employees food cards goes to health cards. Right. Food was provided you went when you get food for free. Now all of a sudden we announced no more. We're going to cut the free market on food and everybody in the street saying we're all going to starve. People are going to starve. Well we all know what happened. I mean it's one of us capitalists things. Are going to grocery right to me when I when I walk into a Russian market. Very big ones. I think it's like the biggest miracle ever. Like food that's fresh from everywhere around the world you know.

[00:09:13] The price of milk. It's unreal. We have to be a little careful though Dan because we don't shop for health care the same way. Exactly because there are these gatekeepers like our doctors or the systems. Yeah. And so so if a doctor says you need x you're like I said well wait I'm not going to go to Washington. I'm going to go to Oregon and see if I can get X at a cheaper price so you can. Your choices are limited to regional or local and you're being told because you don't have enough medical education obviously what you need to do. And so we don't the the consumer side of it is it's challenge for lots of reasons. And that's that's the trouble with the total free market solutions in health care. We don't shop for it the same way unfortunately.

[00:09:54] Let's move on to another American car company. This is a town and city. Yeah. So there's a company called Tesla. And actually we had you know we have a test on our phone it's my wife's car you know once in a while I get it. It's a very fast golf cart.

[00:10:10] Know it's not your primary vehicle though is it a good third car. Yes. Well for you it's by your third 30 your car Belgorod.

[00:10:16] Now American cars here in Detroit. I mean you know what. And I've got a little nauseous because when you get really fat like zero to 6 whatever it is but there's no engine sound and there's no gear. Yes it's like you're on a roller coaster. Whoosh. Yes. It's a little creepy. So give us your thoughts. This is guy you this. He's easy. You know he's he's he's an icon for this bull market. He's in. He is. He's he's building cars in an automated vehicle that's going to turn into soon and he's got space stuff going on. I don't want to go to Mars. That's his goal. I mean I thought mars sucks. I mean you look at Mars. I mean is like negative energy. There's nothing there it's just red stone. Why do we want to go to Mars and we'll get to that live so talk to us about Tesla you're not you're not you're I'm not a fan.

[00:11:04] No I'm not a fan.

[00:11:05] So you know Tesla out to me every once every bull market has sort of its poster children for the bull market both good and bad. And I believe Tesla is one of the bad ones for this market and the reason for that is is that that Elon Musk has succeeded in a public vehicle to keep selling a dream. And when the dream was kind of becomes a little bit mundane he sells you the next dream but he's raising lots and lots of money. This is not an Amazon. This is this is a company that's in a capital intensive business. Auto Yem no matter what he tells you and is struggling and they lose money selling the 100000 dollar vehicles they're having problems getting the mid priced vehicle out and it's not being priced it's actually closer to 60000 dollars. As as you can order the Model 3 today and of course the response now is to tell you he's got a semi coming out in 2019 and a roadster coming out in 2020. Both of those I believe are not true in my opinion. He would have to have the production lines already approved for those they're not approved anywhere that we can find. So it's very doubtful he's going to have that Sommai out in 2019 yet he's out raising money both in the form of deposits and most likely a future stock or bond offering on those those sorts of promises.

[00:12:28] And is he right with you 300 some dollars this year. Yeah. He wisely raising equity all the time.

[00:12:34] I don't know what he will be I think. And then finally you get stuff like the Solar City acquisition which is really really was unbelievably bad corporate governance so he owned a big chunk of Solar City we were short it. So the city in our city was going bankrupt the model of rooftop solar leasing has moved on to distributed solar. They got the market wrong. The stock was plummeting the bonds were yielding over 20 percent. And out of the blue he decides that Tesla should buy solar city for 8 billion dollars and assume debt and stock. For those of you that are financial people Solar City at the time was losing three hundred million dollars a negative even a year before the debt service and depreciation. And he basically saved you know he saved his own equity investment by having Tesla buy him out which I just think is abhorrent and was how did the board and the board approved it and the shareholders approved it. And you know without much of a blink because he controls the board and b the shareholders believe you know pretty much anything he tells them and that to us was sort of a real sign that this thing had taken a dark turn. And I mentioned to you the Enron executive departures we keep a list of the Tesla executive departures that we've seen. He hasn't disclosed them but we find them via LinkedIn and people send us. And it's a spreadsheet now that goes a full two pages.

[00:13:58] Over the past couple of years of all the senior people that have left Tesla they've got their song what's happened and obviously went out there's something wrong there. And you know on top of that you look at the accounting and then finally my own prediction based on nothing more than seeing guys like this operate. I think he's going to leave Tesla within a couple of years. He himself I think he's going to move over Space X what percentage of Tesla he has is actually is reasonable. Wow. That's about.

[00:14:32] Ten billion dollars.

[00:14:33] When he says he's selling stocks he knows he's family is he's not. Although he cashed out some of his foundation a year or so ago. But I think he will start selling stuff once he becomes the non-executive chairman. And my own view is he'll just sort of leave it to his number two and he'll be able to say later it was fine when I left it you know. But if you look at the latest Rolling Stone cover story of him a month ago is that magazine is still rolling stone.

[00:15:00] It's not online only you can get it online. You don't buy them. I remember you bought used to buy to Michigan State you put the. But we also we also bought a magazine. OK Robert you probably read it when Rob Report.

[00:15:12] Well I can't afford that stuff. It's Asprey aspirational. So if you go online or go to go to the head shops or wherever you can get rolling. I don't know that the the cover story and all the glossy photos are him at X not a Tesla him with a space helmet him on top of like a centrefold on top of a rocket. And that was very telling to me. But if you go inside there all rocket they're all right.

[00:15:41] And I think he's getting I think he's getting the world ready for a lateral move over a Space X his dream is to go to Mars. I think Tesla is heading for a brick wall. I think that makes a lot of just dough. I've seen guys like this before. He's going to hit the parachute before before the shareholders do before he hits her.

[00:16:00] Hopefully I have just to and we. I think we're down to a minute or so yeah. Q and A session right. You know I noticed one comment and just to correct the comment I noticed is I've had the luxury or the honor of also interviewing the sort of I guess them in your image other side to you but that would be Warren Buffett and these kinds of interviews. But what I noticed is you guys are basically the same. I mean the way you're you do the work you're doing the work. You can hear it every night it's coming out and doing the work going deep deep deep. And you stick to your and you're ignoring the norm to sort of pushing things aside and sticking to that much different between a hundred billion dollars. Oh yeah yeah yeah.

[00:16:41] Yeah. Sooner or later that adds up again.

[00:16:44] So the other quick question and I meant to ask this earlier and this is this to me is just I know something doesn't fit with this in the markets is it. Why are we at all time highs. Everything and we have the least amount of IPO and people going public. Competition is a good question. I mean that really is something not right. So

[00:17:05] I think though a lot of it has to do with the fact that the private markets have gotten very robust and so so founders and venture capitalists and things like we work and Uber and all these these unicorns really can combine now and sell shares in these liquid private markets. So that that's helped. And I think that a lot of them just simply because of that because they have the liquidity events now in the private markets. That was the allure. Right. They didn't want the public. They don't want to file they don't want to deal with people like me. And so why not stay private as long as they can keep getting funded. And that's that aren't the under pressure.

[00:17:45] I mean a lot of your venture capital cities like that come in. I mean you're running for most of it.

[00:17:51] Let's get you public right and get out right now. But now if I'm Kleiner Perkins Softbank will buy my stake right. I don't have to file it right. I've got Alibaba will buy my stake or there's all these big buyers now these pools of capital sovereign wealth funds who will actually instead of the public they become kind of a dare I say it the money and are buying the stakes from the venture and the executives are Softbank has a document out saying that they have a 300 year timeframe. If you read it it's almost gibberish but you know people are like oh my God he's a visionary. And so let's go read it it's out of line. I urge you to read the SoftBank sort of statement and read from my only son and told me it's not uber 300 at 1717.

[00:18:42] I'm trying to figure out years because right. 1717 Yeah. And that's like that's like 40 years before Washington was born. That's a long time.

[00:18:51] Yes. Can you have a few here and forks of the road. That one right. Yeah that's so. So they found buyers.

[00:19:00] And so who needs who needs the sort of scrutiny that public companies get if you get the liquidity in the private markets and you can stay stay private.

[00:19:10] Do you think you think removing Dodd Frank and making it easier I mean I'll just tell you from Arlen Specter whether or not our flagship we would have I wouldn't even like fathom that thought we would have the thought of going public for that reason that reason only. Right why would you want to waste everybody's time and if you don't need to.

[00:19:27] Why would you. And so I think that you think that I mean I can't speak for most of the debt markets have got easier for private companies to access that any minute now. I'm not business but it would put larger companies.

[00:19:40] And so I think there's there's a fair amount of reasoning. And then of course the public money is burning a hole in their pocket so they've discovered Bitcoin. So we've got the outlet there.

[00:19:50] So just wanted to let's put the Zeri at the Q and A session big here. You know what do you say when people say to you about the shorts I did it you and you had a great answer. Yeah but what about Amazon.

[00:20:04] Everyone said yeah let's Intel the different graphics.

[00:20:08] So when I started out on Wall Street I was in investment banking in Chicago and I was at Blighty's been PaineWebber our biggest account was McDonald's. So I did a junior guy to immerse myself in the history of McDonald's by the way if you haven't seen the movie the founder go see it. It's really a good business movie and it covers some of what made McDonald's unique which was McDonald's figured out the realty model. The real estate business not the hamburger business. And for years in the 70s and 80s any consumer company that was kind of getting some growth it looked like it could be this monster company. People say it's the next McDonald's. And I always used to say you know Gumble. There was no next McDonald's. And nowadays when you get confronted with that sort of questionable business model like like a Tesla or whatever you can sort of model out it just doesn't work right there. Car company loses money. Some say yeah but you could have said that about Amazon and get them all the time. And so I decided to look back at Amazon and I remembered it from late 90s.

[00:21:08] But I went back and recently just did a deep dive into the history financial history of Amazon and what I found was the following Amazon went public in 1997. Their last public offering was in 2001. They've been free cash flow positive every single year since 2001. But the really intriguing thing was until 2012 when they got into the U.S. The basically the cloud they had no capital in their business. Quite literally we finance them through their retail model that if you bought books or clothes whatever you paid them upfront and they paid their suppliers in 30 or 60 or 90 or 180 days and basically like Dell Computer that finance their plant equipment. And so for years Amazon really didn't make any money. But I kept saying they don't have any cap on the business. Right it's the ultimate efficient machine. Once they started investing in a WS and more more growth they started making a profit. The money followed the investment and I know that's one of your dictums. And so there really isn't a business model like this. Alibaba doesn't have this business model. EBay doesn't have this business model and so there is no next to Amazon. And for someone to say that a Tesla which is capital intensive tons of debt raises stock and bond offerings every three to six months.

[00:22:36] As a guy who is going to as a guy who's going to Mars.

[00:22:41] And by the way Bezos has. Interestingly enough he's got his own rocket company. So it was unique animal. And same with Apple. People have said that about Apple while no Apple has 40 percent gross margins in the consumer products business. And Tesla's gross margins are 18 percent. And so you know down the line. The problem is a lot of these statements don't hold up when you actually go back and analyze and understand what made Amazon unique you realize it was unique and that for everyone to say I'm going to justify any valuations 60 billion dollars and Tessler whatever it might be because it's the next Amazon. Good luck.

[00:23:25] Schachter Well I understand a Shuckers changed name just a Shecter is that accurate. Schachter This Shechter that just Shecter sort of like Madonna Cher Sting Eminem covers it all but you guys I mean know I would like to just thank you for bringing something like Jim here and I think he does great stuff. And thank you for connecting. That's just from. One last thing here. And I guess we're going to some Q and A we came up with the name. Together we brainstormed what we came up with the name. For Jim's autobiography or could be just biography that writes. I'll let you tell you what is going to be called.

[00:24:06] Life's too short so I will give him a credit the of when we read the book with a bag of those fat that's been on the way out.

[00:24:14] You guys we do have these are normally 1999 plus shipping and handling. But this is our culture books and by the way is the last time we're ever given out the 2017 edition 2000 18 come out and you're literally there on ebay I swear to god they go up in value. So you know check it out. So we're going to get to you. Q and A's for the remainder of this year. Oh wait before we have 30 seconds to play that clip. 30 seconds. You got it.

[00:24:42] The 30 second clip. You don't want to see it. Sorry. Blue I got a note here. Now that's my. Final table is the.

[00:25:18] Most powerful company in the energy sector. So. There's a lot of fun.

[00:25:28] A lot of those guys were a lot of the guys that were there you just sort of saw that they were all professional poker players. Brian Koppelman who is one of the creators is a big poker player. He did his first movie was called Rounder's. So a lot of people know Ed Norton and Matt Damon as the sort of underground poker scene in New York so. So he was dying to do a poker poker scene.

[00:25:49] That was that I think could be a supporting actor.

[00:25:52] I mean let's not go that far.

[00:25:55] Great. So before we get into some questions I just wanted to share that. You know when we met Jim back in April besides being impressed with his brilliance and tons of knowledge of things he knows a lot. Of. It was really his. You know we walked into his office thought maybe we'd have you know 15 20 minutes to kind of meet him and talk to him and after an hour of talking about Mark Felt rich in Detroit and I'm asking this question our businesses our families. We really built a nice relationship with him and we felt that he was just a real down to earth Midwestern value guy and we thought it'd be great for all of you guys to come and share a little piece of Joe Helper. Thanks. For this. Q In a section here. We thought it would only be fitting if Jim or his groats. Oh god go anywhere. Southfield Winthrop church which doesn't exist anymore. Me. Oh my god I need a bed rest in peace. I got myself later.

[00:27:02] Okay I'll kick it out. So really interesting and thanks for being here Jerry. Talk to me about who you are. I'm Jerry Anderson.

[00:27:10] See you. The energy energy company N10 and we have a trading company an energy trading company ended in 2001. Boy and so we were you know a lot of transactions with Enron everybody was everybody was entering the market and so remember what you were talking about very well but we had to heard a new Internet trading company got us out about eight months before they finally toppled and he got us out because he hired one of these didn't hire. He looked at hiring one of these departing executives. And he dug in when he found out as the guy who was sent to fix the Midwest found out that the problem was that new accounts receivable funds were Mark and these deals weren't collecting the cash up. He called me and said if that's the state of affairs we did everything so. Question for you is you've got this list now. TESLA Yeah departing execs do you ever get. Opportunity of conversations with Tesla.

[00:28:10] Jackson it was. So we're very careful to people we tried not to talk to. I was on the front page of The Wall Street Journal back in 0 6. The the intelligent networks of ex executives and experts we began to worry about that because you always don't want to get material non-public information which you can still get from A to part a departed exec. And I never wanted one of my analysts who wouldn't know better to get in on a conversation and find out something they shouldn't. And and in effect we're still trading on it. Right. That that's just a no no. And so we stopped all our relationships with the with the third party network. And that's still kind of a big business. But we just always worry about that. And so the same thing with with former executives. I don't want to initiate a conversation with a former executive and find out something I shouldn't that's material and non-public if it's public if it's out there on LinkedIn or we can find somebody has left that. That's all well and good but I don't want him telling me something or her telling me something that I shouldn't know.

[00:29:17] So ex execs are considered a source of public where they can be.

[00:29:21] Yeah it depends what they tell you. And what I don't want to be is in a conversation with someone and they're fine telling me all this stuff and then they cross a bright line and say oh and I knew of some fraud inside the accounts receivable.

[00:29:34] Like I'm restricted in the stock I can't trade on it and I never want to put my clients in that position. So we're pretty careful on that. And we we avoid that same thing just a corollary we don't voluntarily share our stuff with regulators or law enforcement. Now that might surprise you but I you I'm not in law enforcement that's not my role. Right. If they approach me and want to know what we know about Valeant pharmaceuticals or Enron or whatever. I'm happy to tell them. But I don't want to be initiating.