Ep683: David Hay – The Importance of Range Expansion

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Quick take

BIO: David Hay has been employed in the securities industry since 1979 when he joined Dean Witter Reynolds, now Morgan Stanley.

STORY: A colleague told David about a business that was going to sell books online. David wasn’t convinced that the business had a competitive edge. So while his colleague invested $50,000 into this company, David chose not to invest. The company was Amazon. Had David invested then, he’d now be a multimillionaire.

LEARNING: Invest only what you can afford to lose. Keep challenging your thesis. Have a systematic quantitative framework to help you keep an open and agile mind when investing.


“One of the most important things in investing is range expansion.”

David Hay


Guest profile

David Hay has been employed in the securities industry since 1979 when he joined Dean Witter Reynolds, now Morgan Stanley.

And since 2022, David has been chief or Co-Chief Investment Officer of Evergreen Gavekal with a special emphasis on macro-economic research.

In 2022, David released his highly anticipated book, Bubble 3.0: Who blew it and how to protect yourself when it blows apart.

The book explores why he believes the financial markets are headed toward a third iteration of past market rotations.

Accordingly, he believes there are a number of investment areas/asset classes poised to benefit from what he has begun referring to as “The New World Disorder.”

Worst investment ever

In November of 1994, David received a call from a colleague. They were both portfolio managers at Smith Barney. At that point, they were investing side by side in virtually everything. The colleague told David about this guy who was starting a company, and he was going to invest $50,000 in it.

The colleague explained that the business would sell books online. David didn’t understand the business’s competitive edge, so he opted not to invest in it.

Six months later, the colleague told him the company was going public. Turns out, the company was Amazon. Had David invested in it when his colleague told him to, he’d now be a multimillionaire.

Lessons learned

  • If the idea sounds great, invest only the money you can afford to lose.
  • The bigger and longer the trading range, the more important the message of the breakout or breakdown is.
  • Constantly challenge your thesis.

Andrew’s takeaways

  • Have a systematic quantitative framework to help you keep an open and agile mind when investing.
  • For every company that becomes a billion-dollar or trillion-dollar company, the good news is that 99.99999999999% of people missed it.

David’s recommendations

David recommends his free newsletter. You can also get a free copy of Bubble 3.0 by emailing him through Substack. David also recommends reading the Felder report by Jesse Felder.

No.1 goal for the next 12 months

David’s number one goal for the next 12 months is to remove his shorts and go max bullish.

Parting words


“It’s always so much cheaper to learn from other people’s mistakes than your own.”

David Hay


Read full transcript

Andrew Stotz 00:02
Hello, fellow risk-takers, and welcome to my worst investment ever. Stories of loss to keep you winning. In our community, we know that to win in investing, you must take risks, but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives, so join me go to my worst investment ever.com, and sign up for my free weekly Become a better Investor newsletter, where I share how to reduce risks and create grow and protect your wealth. Fellow risk takers, this is your worst podcast host Andrew Stotz from A Stotz Academy, and I'm here with featured guest David Hay. David, are you ready to join the mission?

David Hay 00:42
You bet. I've got some serious stories for you.

Andrew Stotz 00:46
I'm looking forward to it. Let me introduce you to the audience. So David has been employed in the securities industry since 1979, when he joined Dean Witter Reynolds, which is now Morgan Stanley. And since 2022, David has been chief or CO chief investment officer of evergreen GAF. Ca, which with a special emphasis in macro economic research, in 2022, David released his highly anticipated book, Bubbles 3.0, who blew it, and how to protect yourself when it blows apart. The book explores why he believes the financial markets are headed towards the third iteration of past market rotations accordingly. He thinks he believes there are a number of investment areas, asset classes poised to benefit from what he has begun referring to as the New World disorder. They David, take a minute and tell us about the unique value that you bring into this wonderful world.

David Hay 01:56
Well, you kind of touched on when you said 1979, there aren't too many people still active in our business that started that many presidents ago. That's when Jimmy Carter was putting solar panels on the White House. I don't think they work, but he put them on there anyway. So I've been through a lot of market cycles. And one of my I think key value ads is being able to recognize and call out and take protective action against bubbles. And really the first one that I got worked up about was the Japanese stock market real estate bubble of the late 1980s. Which, frankly, probably puts any other bubble to shame. Well, I wouldn't say that we went through 2021. But, you know, certainly in terms of the repercussions of complete blowout in the real estate market, and their stock market went down and stayed down for decades. And it really, you know, it was hard to believe that back in 1989 9090, how Japan was looked at as this tremendous economic powerhouse. But after that bubble burst it but 20 years later, they were a joke. There's still venturi, but they're also an extremely indebted country, but just to themselves. My point is that when bubbles burst, they have a lot of negative impacts. So my real first that was kind of peripheral, but the real primary bubble call out was the tech bubble, the late 90s. They've been in business about 20 years, I had a lot of clients, a lot of assets. And I was you know at the time, we still are based in Bellevue, Washington, right between Seattle and Microsoft part of tech land. Amazon had just gone public. It was tech mania. And I was telling people, this is going to end very, very badly. And I was really as I almost always am. I remember saying it was crazy when the NASDAQ hit 2500. Then it went to 5000. But then it went down to you know, basically 100 and something went down 80% roughly are very close to it. What was

Andrew Stotz 03:40
the peak of the Nikkei back at that time i

David Hay 03:43
The Nikkei peaked at 40,000. And I said it was crazy at 20,000. The NASDAQ peaked at roughly five. I said it was crazy at 2500. And you know, like 1998 1999, something like that. And then that's the thing with bubbles there. They can be fantastic moneymakers in that last vertical hockey stick that people said, What's a bubble? And I was telling him, it's really quite easy. Just look, you know, it's like the Supreme Court Justice. He once said, I can't define pornography, but I can recognize when I see it, I can recognize football tickets prices go vertical. Now what you don't know is how far that vertical line goes. And unfortunately, this is one of my main missions in life is to warn people that when those things happen, you've got to sell systematically into them that you get out 100% Just because something looks to be in a bubble phase, you know, in that hockey stick kind of move, but you start to have a systematic disposition strategy. Imagine how much more money would have been made early saved by crypto people who've done that back in 2021 Even in the last year, but they don't do that. I mean, the average person you know they put some money in it goes up a lot and they go wow, this is great and they put more in it goes up more and they put more and and then all of a sudden that bubble pops. Instead of just losing profits. They've had their head handed Go. And it just happened time to end I do everything I can to warn people. So let's go to bubble 3.0. Which so housing was bubble two point I should skip over that one. And that's when I started writing my newsletter, the original newsletter, which was the Evergreen virtual advisor, and in oh five, that's when it started. And it was my mission to warn people that I felt housing was being caught up in a bubble that people like Paul Krugman had exhorted the Fed to do. And Paul McCullough, they were especially Krugman, really, on the case of the Fed, was Greenspan, at the time of you need to create a new bubble to offset the bursting of the tech bubble, which was stupid. Yeah, it was, it was a mild recession, even with 911. But they did it. They push interest rates down to Great Depression levels, but forget that the economy was starting to really go strong. And oh, 304, the Fed belatedly raises rates, they raise them a little bit of time. The meantime the housing bubble just inflates and it plates and plates, and a lot of junk mortgages. So that was really the genesis of my newsletter. So that's been you know, 18 years ago, I started that in reaction to bubble 2.0, then bubble 3.0 comes along, and kind of the, basically, it was already inflating. And then ironically, COVID, pumped a tremendous amount of helium into that blimp, and we got what I think was will go down in history. And I've got a lot of data to back this up the biggest bubble in recorded human history. And that's when I started writing my book to get it out there, which we barely did, we got it out digitally through substack and early 2022. To warn people, this is going to be a bad outcome, including for what you think is a conservative portfolio. So one of the biggest and best warnings in my book was to say if you're a balanced investor, you're probably gonna lose money soon, on both your stock and bond side, your portfolio, which is exactly what happened last year, that was the worst year for balanced portfolios since 1870 150 years. So that's been my mission to try to warn people when these things get so out of whack. And we're trying to protect yourself from the, you know, the consequences, the aftermath. But there's always opportunities, and that's a big part of the book is how do you invest now, and you know, started a little over a year ago, but it's still true, I think we're still in a new paradigm. And yet, so many investors are still using the playbook that worked for the last 40 years.

Andrew Stotz 07:26
I was just looking at this great book called Hidden in Plain Sight, what really caused the world's worst financial crisis and why it could happen again, which was Peter Wallison, where he went through the incentive structures set up by the government, many years before the 2008 crash, to try to force Fannie Mae and Freddie Mac to own lower and lower quality mortgages, which, you know, from a political perspective made sense. But what was happening behind it, this was all happening, of course, behind the scenes, when you have quasi government institutions, you can influence their, their behavior without really getting seen, as opposed to saying, Okay, we need $5 billion to cover the losses for higher risk portfolios that we want to see at these, you know, companies. And so it just fascinating watching bubbles. The second thing I would mention is that in 1992, I moved to Thailand, it was one of the fastest growing emerging markets in the world. And I came here to teach finance. So I taught finance for my first year. And then I realized, it took me a year, David, I was a little bit slow. But I realized that I'm not going to make any money as a teacher here. So I looked around for a job and I found a job I applied for a broker. And they hired me right away. And I became an analyst in 1993. That was September of 1983, this tie stock market doubled. And in January of 1993, it was at 1789. And it proceeded to fall by basically 90%. And 95%. Yeah, 95%, if you could, if you were looking at it in US dollar terms. And that bottomed out in about 2001, from 1994, down to 2001, which was the bottom and I wrote down all the way down. I mean, I ended up doing pretty well throughout it, because luckily, I just didn't have that much money. And most of the money I had I put it into a private company that I was starting with a friend of mine, but I lived through that. And when you look at the reason why I was talking about the Nikkei is if we look at the Nikkei average you know it's at its at its approaching 30,000. But still not back. We're talking about you know, in the case of Thailand, the Thai market, still not back to the prior peak. And that's 30 years. So with Japan, we're talking 3540 years. So I think people underestimate how devastating and how long of a down cycle it can be.

David Hay 09:54
Absolutely. Well, you were there. You got a front row seat for the Asian crisis and I think it actually started in Title That wasn't great. But whenever I did,

Andrew Stotz 10:02
I came into work on July 3, and the Thai baht collapsed. And basically, I was a bank analyst at the time. So I had been working on the Thai banks for many years, and then was a Thai bank analysts throughout the recovery and understanding how to recapitalize. But at the peak of the problem in Thailand, we had 55%, non performing loans in the banking system. Just unbelievable, without, we didn't have a great structure for the legal framework for that to be worked out. So that was created and a huge volume of loans went through that process. But yes, it can be brutal. And I think, let's just talk for a second about a bubble 3.0. If you think about, you know, what, how can somebody I mean, obviously, get the book, we're gonna have links to the to the book in the show notes, and get on your subscription, you know, for your email, and we're gonna have a link to that also in the show notes. But maybe just give us a little tidbit of one thing that the listeners could do to protect themselves in this type of environment.

David Hay 11:12
A great leader, and I think the summary answer to that is invest in scarcity. And I will admit, I stole this from my great friend, Grant Williams, great friend and other great friend Tony Deaton, and that he said that a few years ago, and that's when the stock market was roaring is that I can pay attention to the s&p What I want to invest in things that have true underlying scarcity to them. And I think never is that more hasn't been more important than today, where you have a lot of valuable commodities, literally, that are trading at very cheap valuations at the same time, that Treasury bonds, which are just another way of printing dollars have been created by the trillions in recent years in reaction to COVID. I mean, the US went full on MMT modern monetary theory in reaction to COVID, even though Jay Powell had derided it, you know, a year earlier, said it's a stupid theory, but he ended up enabling it. And really, it couldn't have happened without the Feds implicitly. So as in those hard assets actually performed quite well yet last year, but this year, we've had a real Reversal of Fortune. So a lot of the things that get crushed last year looking at profitless technology companies, they've been the leaders this year. Yet you've got in with the US stock market the Segway a little bit, a very narrow participation. It's it got fairly broad this that out. I mean, it said the s&p was up 7% In the first quarter 95% of that team from 10. Stocks, and 90% came from five stocks. I mean, that is really serious market. halitosis bad breath. Yes. But conversely, a lot of these high quality hard asset plays that come down are I think one of the greatest ways an investor can app protection against the payback for bubble 3.0 is with uranium. And it's a very easy way to play. There is a very easy way to play that with the Sprott physical ETF, as Ruf is the US ticker symbol, but I mean, oil, the fact that oil is it $80 A barrel, what it was $140 a barrel back in 2008, you know, adjusted for inflation, and then you've got the probably one of the most important energy producers that's going to be losing some share of its market. I know the Russians are getting around pretty cleverly, but $80 for oil, and you look at the inventories, and I've tracked the real market for decades, I've never seen inventories this tight. This is an unbelievably tight oil market. And final reopening natural gas has been crushed natural gas at $2. For million British thermal units, when you've got Europe's lost 40% of its gas imports from Russia, and that's not going to change overnight. Gold is looking very interesting even though it may be a little bit extended near term silver as well, copper, this we clearly are going through this great green energy transition. And it just seems like the policymakers are doubling up, despite all the evidence that it's going to be a very costly and much more drawn out process. And they would like but there's going to be so much more copper consumed as a result of the great green energy transition. And yet Freeport FCX is trading at extremely reasonable valuation. The fertilizer companies have been hammered recently. So there's a lot I think emerging market debt where people are saying we're gonna go into an easing cycle. And Andrew this is something that is different than any time in my career. I began to do this for 44 years I became a bond market Voland bull in 1981. And I was a bond market bull from 1981 to 2020. For the most part, there were a few times we're late in an economic cycle with shortened duration, and get prepared for the next one. Uh, you know, inflation surge, and then, you know, but for decades, inflation would flare up a little bit, but never really get out of control. And the yield curve would invert would be a great time to extend duration. This is the only time in my career that I haven't done that. And the reason is that I just don't believe a 10 year Treasury at three and a half percent, given the secular inflationary trends that are now in place. And I lived through 40 years of disinflation, I know what that's like it was a great for my career. I'm not a gold bug by any means. But this time is truly different. So if you want to play what is likely going to be a peaking of the global interest rate cycle, things like emerging market debt, which most US investors don't want to touch, because that's done well, it's actually done well, for the last year or so believe it or not better than treasuries. But still, I mean, it's down because rates are up. I think that way, because I've tried to walk my talk here and not just do what has worked in the past, because I think so many things that have worked in the past won't work in the future. And that's one of them. I also think that the mortgage REITs are interesting way to play if you believe the yield curve is going to steepen. And I think at some point, the Fed is going to be forced to cut short term interest rates drastically. But I think long term right, so a couple of off the wall predictions, I think long term rates are going to rise in a recession, which would be very unusual. And I think oil prices are going to rise in a recession, which is also extremely unusual.

Andrew Stotz 16:25
So let's, let's, let's take some of that apart for a second. And the first one is the uranium. So I'm looking at the Sprott physical uranium Trust, which I think is what you're talking about. And that I'll have a link in the show notes for people that are interested in that. But basically, it says, it holds substantially all of its assets in uranium in the form of u 308. And the goal is to provide a secure, convenient and exchange traded investment alternative for investors interested in holding uranium. And the total asset value right now is about $3 billion that are in it, and they've got 61,000 pounds of you 308. And the nav right now is 12.76. This is according to the website, I think of the originator of the ETF. So one of my questions related to these kind of hard assets is that, and certainly gold has helped in my portfolios over the last couple of years. But there's a lot of people that feel like, Oh, I can't go into these things, they're not yielding. And I'm not getting the return of the stock market, which we know over a long period of time, equity provides the best return. When you think about a beginner, you know, a high net worth person, but they've really been pretty traditional 6040 type of investor. And then you talk to them about these types of asset classes. Obviously, if they subscribe to your newsletter and learn more about what you're saying, they'll get the full picture on it. But are you saying that they should be moving a huge amount of their money? Or that they should blend in some of this? Or how do you think about it for kind of a beginner in the space?

David Hay 18:13
Well, I'm a big believer are firms big believer diversification. So I would certainly not say put everything into hard assets. There's other areas of the equity market, we think are attractive. But I think if I had to rank it as number one, and this has been true for me for the last couple of years, I wrote a newsletter called totally toxic on energy in December 2020, comparing it to the tobacco stocks and 20 years prior. And as you probably remember, Philip Morris from 2000 2020, absolutely crushed the stock market, even though at that time nobody wanted to go near the tobacco stocks with a bargepole. So, you know, energy was in that same kind of a situation at that point. And since then it's up like 150%, it's just it's enormously outperformed this goes up. The XL Lee was up like 56% Last year, you know, when the s&p was down 18%. I'm just enormous Delta. But so that's a way that you can get to a point of not getting yield with these hard assets. These energy companies in many cases have terrific yields. And if you want to play it in quite a conservative way, which has fallen way out of favor, even though it's been rallying is the midstream. The pipelines, you know, where you can get 789 percent cash flow yields on real assets, their revenues are indexed to inflation. That's really kind of a widows and orphans. I'd much rather own something like enterprise products, that's paying say, seven and a half percent, maybe a little lower that's been going up here in the last few days. And all it ever does is raise its distribution has raised its distribution, on average, three times a year since it's been public. And would you rather have a treasury that is doing 10 years it's three and a half percent that will never raise its yield can't raise its yield or something like that. And they're heavily involved with the whole energy ecosystem. system, particularly natural gas. And as you know, the US has been a major natural gas exporter. And that's going to accelerate. When there's these new LNG facilities that are under construction or will be under construction, the US has become a powerhouse in natural gas, which, you know, that save Europe here recently. So there are lots of opportunities out there, but they tend to be in areas that people aren't exposed to, you know, there's just again, this kind of, you know, what's happened? What's worked in the last 1020 3040 years? Well, it's mostly been large cap blue chip, combined with bonds and bonds have provided a very nice counterbalance. Right? So when we've had these periodic downdraft in the stock market, the bonds have done great. That's what happened in the crash of 87, which I'm old enough to remember, bonds had been crushed before that, then they had a monster rally as stocks went into the, you know, the plunge mode. And but it's a very different set of circumstances today, I think people Yeah, I started in 79. So I missed most of the 70s. But I wasn't investing in the early 70s. But not many people remember what that was like?

Andrew Stotz 21:05
Yeah, I mean, I was a kid, let's say 75. I was 10 years old, we were living in Delaware in 77, we moved to Ohio. And I remember the, you know, the lines at the pump. And you know, all the focus on gas. And, you know, petrol as we say here. And one of the things about the energy companies, you mentioned about investing in energy companies as one of the ways to kind of play the energy theme, or maybe the oil price. And then you talked about pipelines being midstream and having a good yield. There's some people I mean, I follow some people on LinkedIn that I know are just like, it's the end of energy, you know, it is not, you know, this has got to stop and how do you quell the fears that someone may have about buying energy now when they see this march of an army, you know, attacking the energy energy industry? And I mean, they've attacked it very well in Germany. I mean, I think they've almost beaten it to the ground, you know, and so I'm just curious, how do you frame that for someone?

David Hay 22:12
Well, first of all, if you look at the developing world, there's no question that fossil fuels have been in a gradual decline the usage of fossil fuels. Now that's just painting with a broad brush. Because natural gas has gone up. Oil has been somewhat flattish to slightly down coal down quite a bit though coal has made a resurgence ironically mentioned Europe. So what is Europe return to to make up for the fact that it's closed down so many of its nuclear facilities and it's lost access to Russian energy is there back to burning coal and rocks and trees and trees they import a lot of Americans don't realize how many would mean massive amounts of wood pellets, they bring it from the American south east, and burn them and they consider that to be renewable is renewable, but it's dirty, it's dirty, or the burning coal in Germany also has is is endowed with lignite, which is the dirtiest form Ecole de Burgh. So ironically, despite all these trillions of dollars have spent on renewables and over the last 10 years, in particular, the usage of coal globally is an all time high. Now, when you burn gas, that yeah, there's methane issues. And the nice thing about methane is it's usually from a few kind of worst offender areas that can be relatively easily captured. I think there's a lot that could be done with reducing emissions. But coal is really nasty when you burn it, to produce electricity. There's a lot of true effluence that are released when you burn oil. I mean, you're primarily releasing co2, which is not a pollutant. It's actually the stuff of life. And I know it's controversial and so forth. I'm not anti renewables, the house I'm sitting in right now is powered by solar power. And it's, I love it. But I also tried to be realistic, and I think the planet and our policymakers need to be realistic. It's an intermittent source, whether it's solar wind, and a lot of the key inputs actually are controlled by China. And do we really want to have what we've witnessed here with Europe and Russia? Do we really want to make our energy future and really the essence of our economy reliant upon China? I don't think we do. And we are been so blessed. I mean, this is one of the most, I wrote a piece on this here a few weeks ago talking about, you know, this gift we've gotten from the shale producers. And yet we don't seem to appreciate it. In fact, we instead of thanking them, we've demonized them, which is exactly what Putin wants us to do. You know, he calls the shell people pedophiles, or at least it's used the Russian media to call them pedophiles. He hates it, why does he hate it because it's made us energy, effectively energy independent. We this is an amazing stat if you don't know how to enter in America over the last 15 years, we've created the equivalent of to Saudi Arabia. Basically 10 million barrels a day of additional production, pretty close on oil and with NGLS, natural gas liquids and then natural gas itself. So one basically being oil, the other one being natural gas. It's an amazing situation. We were building all these LNG facilities on the Gulf Coast to import natural gas. And now we're exporting and we're gonna export even more. It's an amazing gift to the American public. And what do we do? You know, we basically treat them like criminals.

Andrew Stotz 25:28
Yeah. Okay, that helps on that front. My last question related to the different things that you've said, is you snuck in there, David, emerging market debt, which made me think, Oh, wait, man, what are you talking about? Tell us about why you think there's could be an opportunity in emerging market debt?

David Hay 25:48
Well, for one thing, you've had a reversal of behavior. Yeah, by that I mean that what we're increasingly seeing is Western governments running with emerging market, what used to be emerging market fiscal monetary policies. And in the developed world, you know, the so called rich world, we've been increasingly using what used to be considered Banana Republic type of economic policies, I mean, MMT, modern monetary theory being classic case. So for example, a lot of these countries like Indonesia, where they've got real interest rates, and debt levels, to me, the US is one of the highest debt level countries out there. I mean, Japan is the worst offender, of course, but at least they do own it internally. And Japan also has a massive creditor position, whereas the US has a massive debtor position. So this whole idea that US debt is risk free. I think the world is starting to wake up to the fact that particularly long term Treasuries are riskier than a lot of people believe. And I think there's going to be considerable rotation, because back to one of the things you said early on, you know, that rotations of these different cycles into emerging market debt out of US Treasury debt. So it's an Go ahead,

Andrew Stotz 27:05
just to reinforce that. So what you're seeing is fiscal and monetary policies of emerging markets. Turns out, they're now more responsible than what we're seeing in the US and other developed markets. I think of Thailand, you know, I mean, we went through this in 1997. And it really scarred people. And I would say that one of the other things that was interesting about Thailand is they passed a law many years ago, a long time ago about the debt to GDP couldn't be more than I believe it was 40%. That's it. That's the limit. Can't go over that. Well, I

David Hay 27:39
think what you're hitting is very important that you have those kinds of near death experiences. And it, you know, scares the bejesus out of you, and you behave differently put in those kinds of laws. Yeah, in America, we just think we can spend without any consequences. And that's

Andrew Stotz 27:53
that's the other point about the emerging markets that's fascinating is that, basically, the emerging markets didn't have the luxury to pump out a tremendous amount of cash. Take example, during COVID time, take example of tight Thailand, where definitely, you know, things were shut down. And people were in a desperate situation, but the government never printed money to hand it out to, to the local population, not because they didn't want it. I mean, politicians love giving out money. But the first thing is they have the limit of the debt to GDP, number one, but the second thing is that they have the market discipline of a floating exchange rate. And if they started to produce a lot of debt, what would have happened to the Thai baht relative to other currencies, it would have been collapsing. And they knew that and so they were constrained by market forces, which is this old concept, David Muir may remember it when we were young, called capitalism and free markets. Yes. And why Asia free markets? Well,

David Hay 28:53
you're right. In fact, to that point, this is the main perpetrator of my book, frankly, is the Fed. Yeah, I mean, that's really who I blame for so much. They're not me, Congress gets a lot of the blame, too. But the Fed, I think, has the starring role. And Jeff gunlock from doubleline, who is the new king of bonds, he's replaced Bill Gross, who retired, has said, let's just get rid of the Fed and let the two year Treasury notes set monetary policy. And I think it's actually a brilliant idea. I mean, the Fed isn't a very expensive institution to run, their forecasting record has been horrific. I mean, they only get right about 1/3 of the time that you know, the Fed funds rate which they set. I mean, that's pretty pathetic, right there. I mean, go back and look at what they were saying in early 2022. What the Fed funds rate was going to be the end of 2000. But they weren't even remotely in the ballpark. Yeah. So it's a very flawed institution, and it has been a great enabler and inflator of these bubbles. So it's that but that's the point is that the West and also beyond the economic policies also, how about the rule of law, where the rule of law is increasingly at risk in the West words become extremely arbitrary. And I think that's really making it difficult for businesses to have competence. And you know, will this be? You know, if we make an investment today, what will government policy be in five years? I just got an email. Right before we started recording that apparently the state of Washington is considering or think county tripling property taxes, which are already really hot. And I said, Is this fake news? Apparently, it's not fake news. It's just, there's never ever look at look at look at this one fact, your Andrew from the MMT. This tells you what happened when the Fed government federal government went nuts on MMT. And to fiscal year 2022, we had all time high record revenues of $4 trillion, right? The federal deficit was not sorry, there was fiscal 2021. Sorry, fiscal 2021 was $4 trillion of revenue, again, all time high, but the deficit was 2.8 trillion, which was just astronomical deficit, when you're talking close to 10% of GDP, just in a minute, this is it's the idea that they can solve their problems or remedies have been repeatedly refuted.

Andrew Stotz 31:14
Yeah. Unfortunately, I think that you, the institutions that made America great, I would argue the first one is education at the basic level where young people weren't necessarily taught rote memorization. Whereas in the east, it was all based on that, and still is, in many cases, whereas you had some more individualized thinking going on from a young age. And the second thing is the academic infrastructure is at the highest level for PhDs, which I would argue has been destroyed. I mean, if anybody has confidence in the independence of academics in their writing, they may have missed, they may have missed the last two years of almost prostitution of the intellect, because of the COVID madness. And whether that was in the medical space, whether that was in the medical, academic space, whether it's in just pure academia, but you know, people flocked from all over the world to get a PhD in a US institution. And I believe in the last couple of years, that they've destroyed that as at the lowest level of education, it's over, it's just over. For the average person, it's almost impossible for them to get a good education at the lowest level, of course, private education and all that, but that doesn't, that doesn't help the general population. And then the third thing, of course, is the rule of law. And I think that's been really, really pushed to the limit. And I think the fourth thing coming in the post I put on my LinkedIn A while ago, how long before the First Amendment is modified. And I believe that now you have people that see personal affronts, and all kinds of different opinions, more important than the value of free speech. And these items, I would argue, all coming together is just a destruction of what made America the core of America's greatness, there's many other things that made it great, but if those core things are destroyed, then there is no beacon, you know, of freedom in the world. So that's my little rant. David.

David Hay 33:33
That's a good rant. It's all ties together. And it's, it's this ignorance that you're talking about or and prostitutes. So he said, proselytization of the academia and at the PhD level, even and, you know, where you have to say things which are politically correct, even if they're irrational, and policies are pursued, even if they're harmful, and even if the evidence increasingly indicates he shouldn't be doing it. And frankly, that's what I read about with the great green energy transition. There's kind of this denial of physics. When these things just can't happen. You talk to anybody that says there's not enough copper in there. Well, there's not enough lithium, it's just it isn't going to work. And you can't build new transmission line but it just like full speed ahead doesn't matter. This is what we believe this is what has to happen. We're going to do it. And I think you'd say that a lot about Wait COVID was handled where there was a lot of ignorance of some kind of critical facts, but we don't want to go too far down there. We can talk about mistakes.

Andrew Stotz 34:29
My goodness, what an eggs. What an introduction. I mean, there's so many things for the listeners out there. I'll have all that in the show notes. So if you're interested, I think the mention about uranium was an interesting one about scarcity about hard assets. Also, the talk about the energy companies is one of the plays and then emerging market debt I found fascinating in all of that and much more you'll find in David's book as well as in his re Eating. So just pop to the shownotes and click on the links and learn more. Well now it's time to share your worst investment ever. And since no one goes into their worst investment thinking it will be tell us a bit about the circumstances leading up to and then tell us your story.

David Hay 35:15
Well, you know, there's I've got more than one but I'm gonna start with the one that's really the attention grabber. Because, you know, there's there's errors in our business. There's errors of omission and errors of commission. And I think we always think that errors of omission are worse than this, but this one was omission. And do you remember the old TV show? Do you want to be a millionaire? Yeah. My case it should have been Do you want to be a billionaire? And I guess my answer was no. Because I don't think you'll ever have a guess if you have one or ever will have one who made as big a financial mistake as I did. So I had to go back to is November of 1994. So you'd only been in Thailand, what a couple of years at that point. I remember vividly getting a call from a guy that was we were both at Smith Barney at the time, we were both portfolio managers at Smith, Barney. And we at that point, we were investing side by side of virtually everything. And we were leaving on it was right before Thanksgiving, 1994 we were leaving on a family ski trip to my bachelor. He goes Dave, Dave, you really got to hear this guy before you make time. Because he's this company he's starting, I'm gonna put $50,000 which we were pretty young back then that was a lot of money back in those days, and something that was a startup. And he was a smart guy. So you carry really, what did they do? And he told me what they did. And I said, I just don't get the competitive mode. I mean, here's the kicker, giving it away. Can't anybody sell books on the internet has given me a golden chance to invest in Amazon. And what's even more embarrassing is Jeff Bezos, at the time when he was holding these little get togethers literally in a garage or rental house up two blocks from where I was living. And I could have easily if I really didn't know until the very last minute and I kind of forgot about it. And so I really didn't, if I heard him, I probably would have gotten into it. But I did. And then six months later, my buddy calls me he goes Dave, hey, the internet company that I was telling you about selling books and I said, Yeah, the one that I thought Barnes and Nobles could put out of business. And he goes, Yeah, well, guess what? To get ready to go public. And that was like, big companies just didn't do that back then. Or this was when Netscape went public and kind of the whole internet media really took off. But the fact that Amazon was able to do public real, you know, in a fairly quick timeframe, and it was really 96, before they went public. I think they gave me that call Kleiner Perkins it invested in you know, he at one point, he owned 75 basis points of Amazon. And he made a lot of money, though he sold it many, many years ago before the first one that bubble to 1.0. First he sold before that happened, but he never got back in. But still, when I look back, I would have I've probably put in half, I could have owned half a percent or 337 basis points of Amazon, which would make me a multimillionaire. But I said, can anybody sell books on the internet? So that one, if you ever have a guest that missed by that much? Oh, tell me about it, because I think my record is going to stand for a long time.

Andrew Stotz 38:06
That does stand that was May 15 1997, that Amazon went public at $18 per share. So not only did you have a chance at the beginning, but you had another a second chance, and probably a third chance along the way with your friend talking to your friend. But yes, it's so it's so challenging when you see startups and those types of things also to make the bet. So what lessons did you learn from that particular one?

David Hay 38:37
Invest every startup anybody shows you? Well, no. But yeah, that's the thing about it. People will come to you with these ideas. And I'm always reluctant say don't put any money. Just say put money that you can afford to live if it really is a great sounding idea. Put some, again, if I heard the pitch, I probably would have done it. But you know, that's that was a personal loss. The one that I mistake that hangs over me much more for my clients was we kind of touched on this earlier, I believe went when the s&p broke out in 2013. The s&p basically went nowhere from 2000 to 2013 13 years. And it had that major breakout, along with Microsoft, Microsoft was tracking just the same way. And I missed it. I didn't say, you know, this is a time that we need to be at least, you know, equally weighted equities that are targets in our portfolios that we were underweight on valuations. Are we done fabulously coming out of the financial crisis, we bought into that we made a ton of money. And I was kind of in protect mode, because I thought, you know, this, this is the Fed it was q1 q2, q3 was like this is this is fake prosperity. You know, this, just this won't last. How can they continue to prop up these financial markets like this? But the reason I'm harping on that is because that's one of the most important things I can tell your listeners is the importance of range expansion. So that's a term that Paul Tudor Jones created, but I stumbled on it. I call it multi year breakouts right accounts and my magic rule was three years. And, you know, I've actually kind of proven that with a lot of other instances prior to 2013. So I knew at work. And you can see that like financial stocks in oh seven when they were breaking down or breaking multi year support. So what goes both ways, when there is a long term trading band, and that range is violated either up or down, that trend is going to continue. In almost all cases, we kind of know that intuitively. But most people don't invest that way. And I ignored it so many times. So big mistake, and one I still feel bad about to this day. But then God got me, because in 2019, I was short Tesla. And Tesla broke out of a multi year trading range. And guess what I didn't cover right, I kind of covered when I was in and out a little bit. But I got caught short during that huge run up. That happened after, you know, he put out that famous tweet about being acquired for 20 secured financing, which turned out to be complete misinformation. Anyway, I could have bought a fleet of Tesla's for how much money I lost being short Tesla. So I'm just telling you, I've proven it with in so many ways that when you see and it's like the bigger and longer the trading range, the more important the message of the breakout or breakdown is. So yeah, those are what those are my big waves. And they're, they're pretty serious.

Andrew Stotz 41:27
I'm reminded of episode 59 of the podcasts right now we're at about 670. This is back in 2019. It was Danielle DiMartino. Booth. Yeah, who her title of hers was don't fight liquidity flow with it. And sometimes I think one of the lessons that I take away is that sometimes we get caught in a paradigm that we have an opinion or a view. And let's just say it's even worse when it's working, that we get wedded to it. And then something shifts, and we can't see the shift. And so I think one of the big lessons from what you've just said is, you know, how do you keep an open an agile mind, it's very difficult, particularly when your idea is working. But I think that one of the lessons that I would take away is that we always in the investment space have to keep an open an agile mine and I use, some of my style is quantitative based. And one of the things that I love about it is that it forces me to own some things I do not want to own. And that is fascinating, because it prevents me from being too wedded to a position. And it's been a number of times that I've been kind of pushed into some things using a very systematic quantitative framework that I've developed over a decade. But it's pushed me into some things that I didn't feel necessarily comfortable in. But I felt like it's worth testing this out. And one of the recent ones is, you know, overweight, or let's say a higher position on the equity side in Europe. And that's been a little bit scary for me, given all the risks that I see there. Is there anything you would add to my takeaway there about that how to stay agile?

David Hay 43:22
Well, I think you're exactly right. And I do see that happen with people that I respect, admire, and where they just kind of get locked into a certain mindset. And so you have to constantly challenge yourself. So one way I do that is I read a lot of people who I don't really agree with, or I just kind of read stay with them for years when they go through cycles that I disagree. Sometimes I agree, sometimes I disagree. David Rosenberg is an example brilliant guy. There's sometimes I've been absolutely in line with him other times, you know, like, David, what are you thinking? But I continue to read him for what things get fabulous charts, you know, Danielle, somebody that I read all the time, and we weren't exactly in sync? You know, a couple years ago, I think it was much more concerned about MMT and inflation, but you know, really, so I tried to listen to brilliant people, especially brilliant people that disagree with me, constantly challenged. And that's, you know, we talked about golf Cal and I know you know Louis Gob and brilliant. The one thing that's really cool about golf, Cal is they don't have a house view. They have this internal debate and debate with their clients too. So they're constantly challenging their theses. And I think that's a great way to, to maintain that open mind that you're alluding to. But I do find that you know, that may cause technical analysis, I think can get overdone where people look for every squiggle. I'm not looking for squiggles. I'm looking for major trend changes. And when you see something that you know, like what happened the s&p in 2013 or Microsoft in 2013, we're in it just range trade and all that time and their earnings kept growing and PE went from 120 down to 10. And it was cash machine and it broke breaks out to the upside. I mean, those things are just gifts. Yeah. But so often we have people so many If people had been burned holding Microsoft all that time, they didn't believe the breakout. Believe it that's one way that especially really long breakouts. And I think Japan is in the process of doing that right now, by the way.

Andrew Stotz 45:12
Yeah. That's another one that I've been kind of pushed into with my model. So Japan and Europe. So for those listeners out there, you can listen to Louie Vincent Gabs conversation on episode 653 The one last thing I just wanted to say is that for every company that goes to become a billion dollar trillion dollar company, the good news is that to give some comfort 99.99999999999% of people missed it also. So if there's any comfort, you're not alone. All right, what is a

David Hay 45:53
appreciate that they're here with my tombstone? Even this Amazon, here with

Andrew Stotz 45:59
you with the rest of us. All right, what's the resource that you'd recommend for our listeners?

David Hay 46:05
Well, obviously, you know our free newsletter, making him Monday so go to sub stack and get that if you don't see it in your show notes. That's the easiest way to do it for our book if you want a copy of bubble three bullet point oh, a hardcopy, please email us through substack we'll send you a free copy although with your listenership we may get overwhelmed and may because we even more money that's that's also great advice I can give your people don't write a book, it cost me to write a book and I've done it twice now. There's so much information out there. Now it's kind of hard to identify who would be the number one go to but I do. I mean, if you're looking for an individual I have a lot of respect for Jesse Felder, who writes the Felder report is very reasonably priced. So that would be one that I would recommend. But you know, again our stuff because a lot of times we run golf cow so and golf gal if you try to subscribe to it on your own, it's extremely pricey. It's really institutional research. So that's kind of one thing that I think I offer to our readers is being able to distill some of this because I spend a lot of money of our firm's money, my money getting research from people like Daniel DiMartino booth.

Andrew Stotz 47:16
So those are some great ones. In fact, today right now as we speak, which is April 19, that we're recording this. Jesse Felder's episode 6674 just came out, don't rationalize a lousy trade. So some great company that you're in here. Now my next question to you and it's my last question is, what is your number one goal for the next 12 months?

David Hay 47:43
Well, I guess I want to go Max bullish at some point over the next 12 months I've had in my personal account, as we've already talked about, I've had a lot of short positions on for most of the last 15 years. And there have been times where it's been just great, there's been a time has been terrible. But overall, it's been pretty good to me, believe it or not, despite the Tesla fiasco. But I really would like to remove my shorts and go Max long, coming up here some points in the next year. And one of the reasons that actually was listened to the podcast that we got did with one of your competitors, and is just the other day and he made the point that all this money that's fleeing the banking system and going into money market funds, at some point there is going to be a migration of that money into risk assets. I think it's going to be lower prices. And in some cases, much lower prices and overs I think this bear market has not fully played out. I know Jesse elder agrees with that total end. But I think you know, what I don't want to do is miss the big turn when it comes. I think a lot of people are jumping the gun on that, frankly right now. So that's an adequate answer.

Andrew Stotz 48:49
And just to make a correction, I don't have any competitors because there is no one competing to be the worst podcast hosts and listeners. There you have it another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. If you've not yet joined that mission, just go to my worst investment ever.com and join my free weekly become a better investor newsletter to reduce risk in your life. As we conclude, David, I want to thank you again for joining our mission. And on behalf of a Stotz Academy I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

David Hay 49:31
Just don't do what I did learn from my mistakes. It's always so much cheaper to learn from other people's mistakes and your own

Andrew Stotz 49:37
great words. And that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. Let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. I know it's a bold mission. Most people laugh when they hear it, but you won't be laughing when I hit 1 million. This is your worst part. Guys Jose Andrew Stotz saying I'll see you on the upside.


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About the show & host, Andrew Stotz

Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it.

Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth.

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