Dan Rubin: First of all, let me say that it's an honor to be here today with Motley Fool CAPS superstar stock-picker and Foolish senior analyst Seth "TMF Bent" Jayson.
Seth, in your CAPS profile, you state that you "assume things are a scam until proven otherwise." In other words, a company is guilty until proven innocent. Do you think that investors, in general, are too willing to take corporate management's word at face value without digging deeper? And if so, can you say something insightful as to why this might be?
Seth Jayson: Well, there are good reasons in criminal cases to presume innocence. We're talking about lives. When you're putting your money on the line, I think you need to take the opposite tack. Presume guilt. Presume that anyone who's asking you for dough -- and that's what companies are doing when they IPO -- has his best interests in mind, not yours. Many companies do work for shareholders, but even those that profess to may not. The crooks are slick. They know how to use words like "shareholder value" and run buybacks, or even make personal buys, to try to put a veneer of respectability on a shabby or fraudulent enterprise.
I don't know why investors don't pay more attention to this. They're blinded by hope and greed, I guess. If I approached them on the street with some of these cockamamie schemes and asked them for dough, they'd call a cop. Put up a website, reverse-merge with some Pink Sheets shell, and pay some rent-an-analyst shop to pump your worthless stock, and they'll fork over thousands.
DR: As a result of your public criticism of companies, have you ever been accused of being a "basher," or someone who takes money in a corrupt fashion, solely to drive the price of a stock down so that nefarious short sellers can profit from the power of your words?
SJ: Let's see, Patrick Byrne has asserted that I'm corrupt, though he's "humble" enough to say that he doesn't know whether it's a result of bribery or some other mechanism. So yes, I guess you could say I've been called a "basher." Various managers have issued some pretty funny press releases trying to refute what I've said, though most of them never refute anything. They end up looking ridiculous, since all they can do is argue against my opinion, because it's tough to refute facts. And of course, I get email all the time. Swearing. Threats. Threats against my wife, my dog. Some of these people are dumb enough to email you that stuff from their work addresses. Got some interesting hate mail from a professor the other day. I won't embarrass his school by revealing more than that.
Fortunately, I've very rarely been wrong about these kinds of companies, either the frauds or the simply lousy businesses. Take a look at GlobeTel and Pegasus Wireless these days, or Earth Biofuels, or Ipix, or TASER (Nasdaq: TASR ) , or Hoku, or Vonage, or WorldSpace (Nasdaq: WRSP ) , if you want to see the fate of people who don't listen to us "bashers."
DR: Does the hostility toward your work hurt your feelings?
SJ: Mostly, it amazes me, when I see how dense people can be. They'll lose their entire retirement because they believed the PR from some fly-by-night penny stock. But I usually get a few emails from folks, eventually, who are glad I got them out of the scams before they lost even more. I'm writing for those people. The ones who keep drinking bleach no matter how often you warn them not to, well, they can guzzle away.
DR: I have feelings. And I know all too well how painful it is to have mine hurt. Like the other day, when I was crooning the part about where the stallion hits the sun in my shower rendition of Barry Manilow's "Could It Be Magic" and my wife started yelling, "Put a sock in it, you bald monkey." Do you ever worry that your criticism of a company might hurt someone else's feelings? CEOs have mothers, too, you know.
SJ: That's one reason I don't talk to management much. First reason is, they're just going to tell you a fish tale anyway. But the second reason is that, yeah, crooks are people too. They've got moms and wives and kids. But that doesn't make it OK for their breadwinner to stick his hand in your pocket.
But these people are slick. They don't look like monsters. So you have to make sure you don't get sucked in. You can't do your job as an investor, a journalist, or an analyst when you get too chummy with the CEOs. We've, unfortunately, seen harsh evidence of that.
DR: Being serious for a second -- does the amount of corporate and governmental nonsense that you uncover on a daily basis ever shake your faith in the market to the point where you consider getting out entirely?
SJ: Sometimes, yes. But then I see all the wonderful, wealth-building opportunities that the market can provide over the long term. Management is always looking out for itself first. That's why you really need to find and invest in those situations where you can align your interests with management's incentives and interests. There are some insiders whose buys I follow precisely because I think they're sharks, and they buy when the stock is cheap, then they dump when it's not.
DR: Roughly, what is the percentage of companies that you analyze and come to believe are either maliciously fraudulent or so incompetent that they are a danger to shareholders' money?
SJ: Hard to say. Blatant frauds, I see a few every year. Incompetence, a few dozen. I suppose I look at a few hundred companies a year, so, a guess, frauds, a percent or so, incompetent, 10% or so. But remember that my sample is skewed. I'm often looking for strange stuff, so you can't extrapolate those numbers to the market as a whole.
DR: If CAPS players were forced to take cliched Native American nicknames, yours would almost certainly be "Man With Big Red Thumb." Has your success in picking losers in CAPS caused you to add more short selling to your own personal stock market game?
SJ: I rarely short with real money, because the deck is stacked against shorting. Uptick rules, share-price requirements, the ability of crooked management to pretend and spin, as well as the irrationality of the market, make it a tough way to make a real buck. In CAPS, where none of that applies, it works a lot better.
DR: You have found lots of companies that you refer to as "doggy doo" in several industries that irk you. These include alternative energy, housing, and mixed martial arts. Which are your other least favorite industries, and do you see any bubbles forming in industries that we should keep an eye on?
SJ: How about e-commerce? Anyone really think Amazon.com (Nasdaq: AMZN ) can live up to a three-digit multiple because it had one decent quarter of earnings? (A quarter in which cash flow was still flat, and which had an easy comp because of a really huge swing in the tax rate, year over years.) There are a couple of razor-thin-margin online computer sellers that have gone nuts, too.
There are "bubblets" all over. Nano is going to ruin a lot of people's money. So are solar and ethanol. The people buying those stocks are doing it with no regard whatsoever to basic economic realities, like the ease of producing capacity, and the likelihood that the fat government subsidies that make it profitable (barely) will go the way of the dodo. Biotech is full of garbage, which is why you need someone like Charly Travers to help you find your way.
DR: Does your "assume it's a scam" philosophy ever cause you to miss great growth stocks? Apple (Nasdaq: AAPL ) , for example, seems to be mooning you from the back seat as its stock rises.
SJ: I never figured Apple was a scam, although I think Steve Jobs is a despicable CEO. I never figured it could sell so many of those updated Walkman players, either, and that's been the growth story. There -- I misjudged the public's appetite for closed-end systems that lock you into one egomaniac's idea of what you should own, how your gear should look, and what it can and can't do. Apparently, people like that. They don't want choices. They want easy. If I'd paid more attention to the products in the frozen-food aisle at my local Safeway, maybe I'd have understood that better.
DR: I say Uranerz is the funniest-named company in the stock market. Prove me wrong.
SJ: You're not familiar with Boots & Coots? A Chinese phone-services provider I follow has a subsidiary called "WangYou." They're not on my "to visit" list.
DR: Whoa. You didn't just prove me wrong; you proved it beyond a reasonable doubt. Ha! I don't want people to get the wrong impression -- you're not merely a negative Nancy. You've also put up [some] green thumbs in CAPS. So there are companies you do like. In your stock pitches for these companies, you often mention things like the financials, cash flow, earnings, and growth rates. I'm sensing a pattern there. Donning my Frankenstein Monster cap for a second, "Money ... good?"
SJ: Money is always good. It's even better when you buy future flows of it at a discount. Of course, investing like this means making some educated guesses, and that means doing some hard work. Most folks would rather say "I love that product," and pay up for the stock. That can work sometimes, but it's not likely to give you outperformance in market euphorias like this one.
DR: I don't mean to make you uncomfortable, but as an investor, is it fair to say that you think a bird in the hand is worth more than two in the bush?
SJ: You're a deep value guy then, I see. Reading too much Whitman lately?
DR: Actually, I'm a Longfellow man. What if the bird in the bush is a giant bald eagle? Like Exelixis (Nasdaq: EXEL ) . Just a couple of drugs in its pipeline hit, and I'm flying off to my own tropical island, Benty Boy!
SJ: Ah, now I understand, Grasshopper. It all depends on what you pay for the bush. If the price of the bush already accounts for the bald eagles, starlings, cardinals, and penguins and so forth, then you're stuck later. Moreover, you paid up front, and you had to wait. That's why you only pay what's fair for the bush now, by discounting what you think it's worth later to the present day. But that takes, you know, like a spreadsheet or something.
DR: How long does it take you to analyze a stock well enough to recommend it in a newsletter?
SJ: Sometimes, a few hours. Some stuff is that easy. I usually give it at least a week's worth of working days, but sometimes, what you know at the end of that week is only an extra head-nod for your original hypothesis. Sometimes, it's months before you know a business well enough, and the price is good enough, for you to feel comfortable telling others you think it's worth a buy.
DR: Speaking of newsletters, does this one called Global Gains mean that investors can invest in companies outside America?!
SJ: It does. And there are plenty of good ones.
DR: If you could make one adjustment to CAPS, what would it be?
SJ: Get rid of the seven-day hold, so the traders can compete without having a hand tied behind their backs. What are we, afraid?
DR: Not me. I eat fear on a Triscuit. I'm sure we can get David Gardner to respond to this on some blog commentary. What sure-not-to-make-money CAPS-themed product would you like to see?
SJ: I'm seeing a giant foam head shaped like mine with the phrase "Sith Jayson" shaved into the hair on the back of the head.
DR: Seth Jayson, to paraphrase a young Neil Young in The Last Waltz, it's one of the pleasures of my life to interview a man of your stature for CAPS.
SJ: Aloha, Dan.
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