Scott Chan is pretty new to the world of newsletter pitchmen, but he’s apparently been working for Investing Daily for a while as a technology analyst, and is now headlining his second ad for them (that I’ve seen, at least).
The last one was pitching a stem cell immunotherapy biotech stock (which hasn’t worked so well at this point ), but this latest one is teasing a more broadly appealing and probably easily understood idea — he calls it a “technology innovator” that operates a video streaming platform (“a little like Netflix and a little like YouTube”).
So let’s see what he’s pitching, shall we?
I do first have to get a little fuming off my chest — so prepare for a bit of a rant. The whole lead-in to the ad is irresponsible in its promotion of the notion that you can “Retire wealthy in two easy steps” that involve, essentially, finding the best stocks in the world and concentrating your whole portfolio in them, and selling near the peak.
Which almost makes my head explode.
Yes, duh, if we knew which stocks would be the big winners we would all bet our entire retirement savings on them.
Yes, Warren Buffett does say that diversification “makes very little sense for those who know what they’re doing” … but that’s just self-congratulatory twaddle (I’m a big fan of Warren’s general investing philosophy, and Berkshire Hathaway is my largest stock holding, but there’s a huge gulf between “knowing what you’re doing” and “being the most accomplished and revered investor of your generation, who has never had a moment when he had to worry that he’d be eating cat food in retirement”). Compared to Buffett, most of us do NOT know what we’re doing… and, perhaps more importantly, do not have the patience or the stomach to handle that kind of portfolio concentration.
How many people do you talk to who think they’re below average? Average, even? We are hard-wired to believe in our own exceptional brilliance and skills, but when it comes to investing the obvious evidence says that’s not true: We are dummies, and we do stupid things most of the time, and often we are pretty sure that we know what our “best ideas” are, with only the better angels of our nature (or the fact that we’re not married to someone as foolish as ourselves) protecting us from betting the farm on bitcoin when it seems destined to turn everyone into billionaires.
Here’s the opening of this ad, which is pitching The Complete Investor ($40/year)…
“Financial ‘Anti-Guru’ Issues URGENT WARNING…
“If You Own ETFs, Mutual Funds, Or More Than 5 Stocks,
“SELL THEM ALL NOW!
“REVEALED: ‘Escape Plan’ for Adding $1,000,000 Or More To Your Retirement Account… Starting Today”
Can you imagine how damaging that is for people who are freaking out about recent dips in the market, and panicking about their retirement? That’s essentially telling someone exactly what they want to hear: That their fears are real and they should sell everything they’ve carefully built up over years, and that we’ve got a way for you to get rich right away and stop this boring savings and gradual wealth accumulation track — no worries!
It works partly because there are lots of cliches and lots of manipulative schmucks in the financial industry, of course, and it is human nature to be grouchy about the fact that you put 10% of your salary into index funds in your 401(k) for 20 years, just like you were told, and yet you are not a Rockefeller (or worse, that your obnoxious neighbor or brother-in-law is a day trader or a bitcoin enthusiast and claims to have made millions while you were being a “sucker.”)
And he just ladles kerosene on the fire of frustration you might be feeling about your portfolio just now:
“Wall Street brokers, fund managers, and gurus wear $5,000 suits, drive Porsches, and spend weekends at their multi-million dollar ‘second homes.’
“Clearly, they’re not practicing what they preach.
“In 2017, America’s top three Wall Street banks made a total of $46.7 billion .
“And I guarantee you, they didn’t make that kind of money by…
“Investing in ETFs, mutual funds, and blue chip stocks…
“Or buying and holding for the long term.
“No… Insiders play by a completely different set of rules.
“And today, I’m going to share with you…
“The truth about getting rich in the stock market.”
And then the examples come in, which is what really gets my goat — he talks about some big trades from people who sound like “regular folks” and implies that they made their fortunes from not diversifying and by making a big concentrated bet on some hot stock tip (like, perhaps, the one Scott Chan wants to sell you today) … here are a couple examples:
“Denise Grant, a 63-year-old from Rochester, New York added $1,490,139 to her account when she sold 1,863 Google shares….
“Patty Donovan… a 62-year-old from Palo Alto, California. Patty sold 5,141 shares of NVIDIA stock and pocketed $1,134,776 in cash….
“When 57-year-old Joseph Cameron sold a portion of his Microsoft shares, he added and incredible $1,980,462 to his retirement account….
“Denise, Patty, and Joseph life in different parts of the country and have completely different life situations…..
“All three people share a secret…
“A secret that brokers, fund managers, and gurus have kept closely guarded for decades.
“A secret designed to make insiders wealthy…
“And toss you just enough small wins to keep you coming back for more, year after year.
“If you keep playing by the rules you’ve been taught, you will never have the retirement lifestyle you deserve.”
And then, of course, the sell…
“But it’s absolutely critical you pay close attention to what I’m going to share in the next few pages.
“Because… as Denise, Patty, and Joseph have shown… this information can put seven figures in your retirement account starting today.”
This is a family publication, so I can’t use the words I want to use right now. But Aaargh! Frickin Frackin Flibbidigibbet! That’s all malarkey.
“Denise Grant” is probably actually Diane Greene, who is on the Alphabet Board of Directors because she was one of the founders (and was President and CEO) of VMWare… and she’s a senior VP for Alphabet, and CEO of Google’s cloud business right now, per her Wikipedia page, though she’s apparently stepping down next year. Maybe she’s retiring, I don’t know, she is really also a 63-year-old woman from Rochester, she apparently has some hobbies, and she’s very rich so hopefully she has her health and she can do pretty much whatever she wants. She says she wants to mentor women in startups.
The million dollars or so that Diane Greene got from selling 1,863 of her Alphabet shares in August of 2017 (that was just one of her sales, she had several similar ones that year) was not likely a major event in her life… I don’t know how much money she has, but her “retirement secret” has been building several companies over a couple decades and being really smart and driven and active in a hot technology area, building VMWare to the point that it was bought out by EMC and then starting a company called Bebop that was bought by Alphabet (when she was already on the Alphabet board)… she’s not a middle-class worker bee who got lucky with a big bet on GOOGL shares.
Greene/”Grant” is also one of the “Top 50 Women in Tech”, according to Forbes… that’s a great goal for a professional striver, but it’s not a retirement strategy that you buy in a $40 newsletter.
How about the others? Are they equally ridiculous? Pretty much, that’s where copywriters tend to get these kinds of examples of “big winners” — the SEC filings where insiders, including board members like Diane Greene, have to report their sales. And they typically change the names a little to “protect their privacy” (or whatever their rationale is).
“Patty Donovan?” That’s almost certainly actually Persis Drell, who is, no surprise, on the Board of Directors for NVIDIA… here’s the summary of her Wikipedia page:
“Persis S. Drell is an American physicist best known for her expertise in the field of particle physics. She was the director of the SLAC National Accelerator Laboratory from 2007 to 2012. She was dean of the Stanford University School of Engineering from 2014 until 2017. Drell became the Provost of Stanford University on February 1, 2017.”
And yes, as teased, she has sold NVDA shares quite a few times over the last three years that she’s been on the board (she has been granted roughly a million dollars worth of shares for her board service) — the most recent sale was, indeed, of 5,141 shares for about $1.1 million back in March… she still holds about 22,000 shares today. She’s probably not as wealthy as Diane Greene, she has been an academic and a researcher more than an entrepreneur, and I don’t know of any windfalls she might have had like the sale of VMWare to EMC for Greene, who’s a Google executive as well as a board member, but she’s definitely at the top end of the academic earning pyramid as Stanford Provost these days — she isn’t counting pennies, I expect, and this isn’t a “save her retirement” trade that she made with a brilliant stock pick.
I didn’t look up “Joseph Cameron” … presumably that $2 million trade example is similarly misleading. Maybe it’s Microsoft Executive VP Jean-Philippe Courtois, who has worked his way to near the top in MSFT over 35 years and is presumably doing just fine, but that’s just because of the matching initials that Chan seems to like, I didn’t check the SEC filings.
And there are a bunch more that Chan hints at — “Jake Williams” who netted a big gain on Amazon shares must actually be Jeff Wilke, one of Amazon’s CEO’s… the stock sale by “Anna Dickson” from New Palestine, IN matches up perfectly with Angela Ahrendts, former CEO of Burberry and now Apple’s highest-paid executive… you get the idea.
So yes, if you can work your way up to be a leader in your field, and become a board member or executive of a hot technology giant and earn a big ol’ salary and lots of stock grants… you should do that. It’s really good for your retirement portfolio.
If you can sell your tech startup to one of those companies for huge gains, that is also an effective retirement plan.
And yes, if you are Warren Buffett and you turn out to be the best investor in the world after 50 years, you can chose your best 5 stock ideas and bet 2/3 of your portfolio on them and continue to make huge bets with other peoples’ money (and free leverage) to build your empire.
Those are all excellent strategies for building an exceptional life, if you have a dose of brilliance and the good fortune to be in the right position at the right time with the right mindset, education and skill (and sure, throw in family support, early health, chance meetings, good marriages, being born in a wealthy town in a wealthy country, etc. etc.).
But those are also good examples of a kind of survivorship bias… plenty of money managers over the past 50 years have run concentrated portfolios, like Warren Buffett, and lost TONS of money… plenty of technology professionals and University researchers have had successful careers without founding successful companies (most startups fail miserably), or without reaching the top of University leadership and enjoying Board positions that throw tons of stock grants at them each year.
We know this, but we don’t always know it. There are lots of 18-year old basketball players who work just as hard as the guys who make it to the NBA, and whose skill and physical attributes are almost impossible to distinguish from the best, but don’t have the good fortune, timing, drive, support, or luck that lets them rise to the top (or, usually, even make a living at it). Winners prove that such things are possible, and they give us space to dream, but they don’t tell you much about how likely those exceptional futures are, and investing is a game of probabilities.
But those “lightning struck here” lives are probably not terribly useful as examples for you if you’re a prototypical newsletter subscriber (which, as I understand it, is a 62-year-old white guy with a decent 401(k) but some qualms about whether his retirement savings are going to be enough). And those aren’t outcomes that can be gifted to you in exchange for a $40/year newsletter subscription.
Sorry, got on my soapbox a little bit there… and took a little too long to wade through that muck… but those things make me mad. Especially when they put little fake photos of ordinary looking people on a map and imply that these folks are just spread around everywhere, grabbing million-dollar paydays higgledy-piggledy, like “Denise Grant” in Rochester. Of course, they could have used actual photos of Diane Greene or Persis Drell, and most of us still wouldn’t have recognized them, but I guess they might have needed permission for that. And it would have let the cat out of the bag a little, putting Investing Daily at risk of not getting your $40.
Here’s just a bit more on the “anti-diversification” rant that got me a little grouchy:
“ETFs and mutual funds are the most extreme examples of diversification.
“They often hold hundreds and sometimes thousands of different stocks.
“But even if your investment account contains more than 5 or so individual stocks today, you’ve also fallen prey to the diversification myth.
“Here’s the truth… and it’s something Wall Street insiders don’t want you to know…
“Diversification is not designed to make you wealthy….
“Mr. Buffett isn’t afraid to put his money where his mouth is.
“At the end of 2017, his Berkshire-Hathaway fund held assets totaling $171 billion.
“But 65% of those assets—or $112 billion—was invested in only five stocks.
“With a 53-year track record and annualized returns that are more than double those of the S&P 500, it’s clear Berkshire-Hathaway’s methods work well.”
Not sure where he gets those numbers — Berkshire had about $700 billion in assets at the end of last year, matched against $350 million in liabilities… so that’s a book value of about $350 billion. Maybe the investment portfolio was $170 billion at the time… and yes, the portfolio is very weighted in the top holdings (even more so now, with the addition of a huge position in Apple). But anyway, yes, we can stipulate that Berkshire’s methods have worked well… for Berkshire, led by Buffett and Charlie Munger, for 50 years. If you’ve got Buffett/Munger quality investing chops, you’ve got better things to do and you stopped reading this claptrap a long time ago.
Then he takes on indexing:
“The S&P 500 index returned 19.4% between January and December.
“If you’d invested in an ETF that tracked that index closely, it’s likely you’d be happy with the gains in your account.
“But what about 2017’s top-5 performing stocks?
“They returned an average of 450.6%…
“More than 23 times the S&P 500.
“The point here is clear…
“When you diversify, you reduce returns.”
Really? Reduce? I think the word you’re looking for is “change” returns. You get a different result from the market if you don’t buy the whole market.
If you buy the stocks that will be the top five performers for the year in January, and then sell them near their peak, then yes, you’re going to do AWESOME. I’ve never done that, and I’ll bet you almost anything that Scott Chan hasn’t, either. Nobody does that. The very best long-term records in investing top out around 20% a year, compounded over 5-10 years or more, which is exceptional… but it’s nowhere near as good as “buying the top five stocks every year.”
What if you mixed in a few of the bottom five performing stocks? Think that’s possible? There were some well-known names in that group in 2017, stocks that would probably have given a lot of investors some confidence, like big athletic brand Under Armour (UA), General Electric (GE), natural gas leader Range Resources (RRC)… if you bought the bottom five instead of the top five, you would have lost almost half of your money.
That’s why you diversify, because of the obvious risk that sometimes you buy the bad ones. Everybody does. Warren Buffett held a huge position in IBM for years and didn’t make any money at all on it (he didn’t lose all that much, probably roughly broke even, but he didn’t sell anywhere near the top, either).
OK, fine, I’ll stop lecturing you on this. Yes, it’s fine to try to beat the market if you want a hobby, but don’t give up on diversification. And please don’t sell all your stocks and mutual funds and put that money into whatever this stock is that Chan is recommending…
… but yes, I will sniff through the clues and name it for you, at least, so you can research it and make your own call on the company’s prospects.
So what’s the story?
Here’s the promise from Chan…
“Here’s the good news…
“You don’t have to worry about picking the “right stock” because…
“I’m going to do it for you.
“None of your neighbors, friends, family members… not even financial news jockeys or brokers will have the information I’m sharing today.
“That means you’ll be able to buy this stock at the lowest possible price and have an opportunity to add seven-figures to your retirement account….
“I believe this break-out stock is only a few weeks away from taking off…
“And turning every $10,000 into as much as $1 million… maybe even more.
“This is the right stock and now is the right time.”
So along with the irresponsible “sell everything” headline, we get plenty of hype. And then he gets into the specifics about the company…
“… once or twice a decade…
“We find a company that’s truly special.
“A company with the right product, the right market, and the right timing.
“A company that’s perfectly positioned to become the next market disruptor…”
He gives some examples of extraordinary gains, to tantalize — 66,000% on Apple if you bought at the IPO price in the 1980s… almost 29,000% from Netfix over the past 16 years… 92,000% from Amazon over 20+ years. So I guess that’s the goal… hard to argue with those (though remember, survivorship bias… there were other computer companies in the 1980s, other video rental companies and potential streaming providers in the early 2000s, other ecommerce companies in the late 1990s — it wasn’t the idea of these cool things that made you rich, it was picking the right company and sticking with it, in each case patiently holding through at least several massive losses, Netflix was down 82% at one point, Amazon was down almost 95% during the dark days).
What specific clues do we get about the stock?
“This isn’t a shady, penny stock trading on a no-name exchange….
“In fact, the company’s IPO price was in the mid-teens and it’s been trading actively since early 2018 on one of America’s largest exchanges.”
OK, that narrows it down a lot.
And we’re told that it’s somehow similar to Netflix…
“Like Netflix, the company creates its own original content… close to 200 new movies and series in 2018.
“And it charges subscribers a monthly fee for unlimited access to the entire advertisement-free video library.
“But the company also has a YouTube-style membership level where viewers can watch millions of non-premium videos for free.
“With a free membership, viewers see advertisements during the videos they watch.”
And it’s apparently doing very well at bringing in subscribers:
“… the percentage of paid subscribers has increased by 6X since 2015.”
And the ad teases that the company is “breaking new ground” witha “leading-edge set-top box” that combines streaming and cable TV, the “world’s most advanced VR headset” for lifelike 4K resolution, classic Nintendo games on their platform, and lots of relationships with other membership groups and retailers to drive new members their way.
They also apparently are focusing on content…
“Despite developing 200 new movies and shows of its own in 2018, the company has licensing agreements to stream content from some of the biggest Hollywood studios including Paramount, Warner Brothers, Lionsgate, Fox, Sony, Disney, and Universal.
“They even have a deal in place with Netflix… to distribute some of their top-rated movies and series.”
And some hints about their last quarterly results:
“Subscriber revenue increased 78% over the third quarter of 2017.
Revenue from the sale of online games and merchandise was up 157%.
Revenue from original content licensing and distribution was up a whopping 220%.
Total subscribers increased 89% year over year.”
And then we’re given one more clue — which, in case you weren’t yet 100% sure of your answer, will be enough to inspire you to write it in permanent ink:
“The company I’m sharing with you today is not banned from the Chinese market.
“The company’s CEO has a special relationship with key decision makers within the Chinese government.
“So it’s able to generate advertising and subscription revenue by tapping directly into China’s gigantic 802 million viewer market.
“And that gives the company a huge advantage over Netflix, YouTube, Amazon Video, Hulu… and every other video platform you might be familiar with.”
So who is this Chinese tech company? It’s our old friend iQiyi (IQ), which I own a few shares of and which was teased by the Motley Fool Rule Breakers folks back in the Spring, when it went public as a spinoff from the tech giant Baidu (BIDU).
Sadly, the shares have reacted poorly to the general displeasure with Chinese investments — the stock soared on the “Netflix of China” enthusiasm into the summer, but it has been headed steadily down ever since and is now right about at the price where it IPO’d (and where I bought shares personally — I did trade some options on the way up to book some gains, but did not buy or sell any more shares after that first purchase on the post-IPO dip).
Why, then, does Scott Chan think the stock is going to soar? He seems to be basing this on some combination of “people hearing about it” and “raising subscription fees” — in particular the latter, here are his words:
“As of right now, Wall Street institutions own a small fraction of the company’s outstanding shares.
“But that could change any day.
“It will only take one financial news network to blast the company’s name and logo on the evening news…
“At that point, I predict it will be too late….
“During the company’s third quarter earnings call, the Chief Financial Officer discussed the possibility of increasing its monthly subscription fee.
“He didn’t discuss the size of the increase, but…
“I’ve run some numbers and my analysis shows that just a $1 per month increase would generate…
“An addition $949 million in annual revenue.
“And that’s with zero subscriber growth.
“Because the company has had phenomenal success turning free users into paid subscribers, I believe a price increase is coming soon.
“My gut tells me that in early January 2019… as soon as we’re clear of the holidays… the company will announce an increase.”
Maybe so, none of us can know… but iQiyi is similar to Netflix in that it’s investing very heavily in content, which means that they really need to create compelling content that keeps users subscribing and renewing, and they need to have investors embrace that strategy. It’s been up and down sometimes for Netflix over the past decade as pundits have argued about whether subscriber growth is enough, or about how much money they can afford to spend on international expansion and new content… but it has worked out very well for them, on balance.
The challenge for iQiyi is that unlike Netflix, they have competitors with pockets at least as deep as their own in Alibaba and Tencent, both of which have massive streaming video services (Youkou and Tencent Video), and, like iQiyi, both of whom also have the advantage of looking at the template Netflix has laid out for them. They don’t have the focus that iQiyi does, and arguably iQiyi has better and more original or exclusive content in China, and faster subscriber growth, but that can change pretty quickly when you’re throwing around billions of dollars.
IQ is young as a public company, but it’s not exactly tiny — it has a market cap of $12 billion or so, down from $30 billion at its peak in June, and is still burning through tons of cash (part of why Baidu wanted to spin them out, I assume — the hope that they could get a Netflix-like multiple and also raise billions of dollars for content creation without draining Baidu’s coffers).
I’m inclined to consider buying a little more IQ, but the financials are not supportive of the stock in any fundamental way so I’d keep it very small — this is a stock that could fall 50% more with ease, even as it could, of course, rise a few hundred percent if sentiment shifts.
And most of that sentiment right now has little to do with IQ’s business — you can say something similar about most of the big China tech names during this year’s trade war and feared China growth slowdown… here’s what some of those stocks look like over the past six months (MOMO and HUYA are video sharing companies, somewhat similar in size and focus and similarly weak, the others are well-known China tech leaders Tencent, Weibo, and Alibaba that have been declining on the same trends but with less volatility):
Chan ends with this admonishment:
“At this point, there are only two paths you can follow:
“Take a position in ‘The Video Disruptor’ right now while the stock is still cheap. Then over the next few months, whenever you hear the company’s name in the news, you can give yourself a high-five knowing there’s a good chance your share price is increasing.
“Ignore this opportunity completely. Then every time you check the stock’s ticker, you’ll kick yourself (again) for missing out on a once-in-a-decade disruptor that could have paid for your retirement.”
There’s a third path, of course: Research it yourself, think about whether you want to own a share of this company, and gradually build a position — probably at prices both above and below the current price, since you can’t predict the future.
Or, must we say, a fourth path: Say this looks way too wild for me, and I don’t want to make what is effectively a levered bet on US investor perceptions about China. The stock being at new lows, or looking cheap relative to its short history or to more successful and established companies like Netflix, does not mean the stock is going to go up… though my guess would be that a China recovery, which would presumably be driven by changing perceptions of the trade war negotiations heading into the March 1 deadline for these latest tariff disputes, will be the next spur.
That’s not because the tariffs mean anything for iQiyi… or, for that matter, any thing direct for Baidu, or Tencent, or Weibo, or most of the domestic internet companies in China, most of whom don’t do much cross-border trade with the US. It’s all perception, and the worrying about the indirect effect that trade wars and declining growth rates might have on the Chinese economy, which will indirectly impact memberships and advertising and the value of the currency and who knows what else.
That doesn’t mean the fears aren’t real. If China’s economy slows markedly because of this trade dispute, as it seems to be showing some signs of doing already (though with a command economy, one never knows when the government will shift the story overnight)… or if China’s debt problem becomes worse or more acute, or Chinese consumers stop spending for whatever reason, that would obviously be bad for IQ. That doesn’t mean their membership growth will slow, or that their revenue growth will drop dramatically, but it does mean that investors would think of their revenue as being less valuable… probably.
So yes, IQ is the stock being teased as Scott Chan’s “Perfect Retirement Stock” … and I like the company as a speculation, I think they do have a small advantage over Tencent Video and Youkou right now and might be able to turn that into a dominant subscription business over the next few years… but the stock is in the throes of China panic and I don’t know when that ends. I remain inclined to gradually grow my position a little at prices near or below this point, while optimism is pretty muted, but the stock could still fall considerably, particularly as they spend billions on a high-risk strategy of heavy content spending, and I’ll keep my speculation small. I did buy a few more shares this morning.
That’s just my thinking, though, and it’s your thinking that counts — it is, after all, your money. So what’ll it be? Going to bet your retirement on Chinese streaming video company iQiyi? Looking to become Provost at Stanford and get on a couple corporate boards to buttress your retirement savings? Let us know with a comment below.
P.S. The Complete Investor has been through a bunch of changes over the years, since it was started by Stephen Leeb decades ago, so we’d also like to hear from any subscribers who’ve got an opinion on the newsletter today — if you’ve subscribed to The Complete Investor, please click here to share your experience with your fellow Gumshoe readers. Thank you!