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David Tice on being reliably short, starting his prudent bear fund and sticking to fund mandates (1:50). (NYSEARCA:HDGE) ETF – Staying short all the time; doing well this year relative to inverse of the market (7:10). Short exposure, reliable hedging, bad companies starting to decline (11:20). Market bubble will lead to crash in 2024 or 2025 (14:50).
Transcript
Rob Isbitts: So welcome back to Seeking Alpha’s Investing Experts Podcast. This is Rob Isbitts, you know me as Sungarden Investment Publishing on Seeking Alpha and a fairly frequent guest of Rena Sherbill, but I’m on the other side of the microphone today, and I am talking with one of the people that really earlier in my career, and if you will, in my formative years, late ’90s, early 2000s, was one of the folks who influenced the way I invest and have for the last couple of decades.
And that is David Tice, who is with me today. David, it is such a pleasure to really not just speak to you, but meet you for the first time. For those of you who don’t know David, if you remember the Prudent Bear Fund, well, that was him. He was the Prudent Bear.
He’s still very prudent. My guess is, he’s still fairly, bearish, but we’re going to talk about that and the use of those terms, but first, David, if you can maybe just take us back. You’ve had a pretty fascinating career I think. And if you can maybe just for those who are not familiar with your work or maybe were familiar with the Prudent Bear Mutual Fund back in the day, but maybe haven’t kept up with you as much since, just give us your story, how you got in the business and how you proceeded through up to what you’re doing now?
David Tice: Okay, Rob. So, I’m actually an ex-accountant, CPA and Finance MBA. At 31, I started an investment research firm called Behind the Numbers. Accumulated about a 100 institutional clients. We worked with Soros Fund Management, Tiger, Federated, Michael Steinhardt, providing Sell recommendations to money managers and had a number of short sellers who were clients and that was really Phase 1 of my career and had a number of analysts.
We were the people behind the original Tyco call where we said Tyco was aggressively utilizing cookie jar reserves and don’t necessarily count on earnings being sustainable going forward. And 26 Wall Street firms came to the defense of Tyco. And I started the Prudent Bear Fund in 1996. Faced four years of losses, we provided a fund that was reliably short. And we told clients that we would not try to time the market, but we would be there with professionally managed short exposure when the market declined.
And therefore, we made a lot of money in ’00 to ’02, and also in ’08. We actually made money in three of the six years between ’03 and ’07. And then I sold that fund to Federated in ’08, very fortuitous timing. I worked for Federated for a couple of years as a consultant. And then the last few years, I’ve been involved in private equity, started a charity, actually produced a couple of movies, and recently produced an award winning documentary about the power grid.
RI: I share this in common with you. I managed a few mutual funds in my career. You will understand this date as much as anybody. The very first day of my life that I was a mutual fund manager was August 14, 2008. And the S&P 500 proceeded to drop 55% in the next seven months. I’m a baseball fan, so I like to refer to it as, hey, welcome to the show, kid. You’re in the big leagues now.
But, look, I mean, I ran a fund of funds at the time. It was a fund of mutual funds, some ETFs. ETFs were a bit newer then, but – and your Prudent Bear Fund was part of it. And I think that’s maybe one of the lessons for investors. In a lot of cases, if you’re trying to track the S&P 500 and you have a fund that does that, it’s doing its job.
If the mandate of a fund, whether it’s active or passive, is to provide a way for people to have something in their portfolio that is making money when the market goes down and then maybe making a lot of money when the market goes way down, then that’s doing their job too, but sometimes I think, I see this in the comment section of Seeking Alpha all the time. Oh, well, I’d never invest in that fund. Look how poorly it’s done.
Well, but maybe it’s only designed to perform when certain market conditions are met. It’s a byproduct.
Can you talk a little bit about that, given that so much of your career has been spent really filling that role for investors?
DT: Our mandate was to be short all the time. And this was during the period – 1996 was when Alan Greenspan made his famous irrational exuberance speech. And people thought I was crazy during those four years when we lost money, but my mandate was to lose as many as – as little money as possible, but continue to keep the short exposure on so that you could defend yourself if the market did decline, and essentially we did make a boatload of money in ’00 to ’02.
RI: Yeah, and so, I mean, the Prudent Bear days, certainly that worked out pretty well, I think for people who used that mutual fund for its actual purpose. Now fast forward to today because you’ve stayed tied to the investment business and I think in recent years you got involved with a company, I believe you didn’t start it, but you joined it.
And I’m sure certainly that was a big day for them when you joined the folks over at (HDGE), that being the symbol, Ranger Equity. Tell us about that, your role there, and then we’ll get into current market view and all that?
DT: So, Ranger Equity Bear is run by two gentlemen, Brad Lamensdorf and John Del Vecchio. And they founded it probably more than a decade ago. And I’m a senior advisor to them. John Del Vecchio used to work for me for a number of years at Behind the Numbers. John has written a book. Brad used to work with Tommy Taylor out of Fort Worth and part of the Bass Enterprise, he’s a great technical analyst.
And so we end up shorting stocks. We stay short all the time. And it’s been tough to be short over the last decade, but we’re doing extraordinarily well this year relative to the inverse of the market, where the market is up between 18% and 20% the Dow, compared to the NASDAQ, and we’re only down about 2%.
So, we’ve made money as, bad companies are starting to underperform.
RI: So, you’re hitting on something, a couple of things actually that I explain a lot in my writing.
Like you said, it’s tough to be short the last decade and sure you can have pockets of opportunity, but, I’m sure that you and Brad and the other folks there, John, have noticed same thing that I have, which is that we’re going on about three years here, where if you look at the S&P 500 or especially the NASDAQ, you see pretty strong returns except for 2022 and then 2023 was pretty much a makeup, and 2024, it’s been the tiebreaker in favor of those indexes going up.
But now if you go over and you look at, and the ETF I always use just as a marker is (EQAL), which is the Russell 1000, top 1000 stocks, but they’re equally weighted.
So the average of the top 1000 U.S. stocks is about flat for three years. Has that made it a little bit easier or do you tend to focus on shorting maybe what is most overvalued, which I guess based on fundamentals might be the stuff at the top of the market?
DT: I’ll be honest with you, it has been tough. You would think it would be easy to find stocks that are going down, but it’s tough as a short seller when the market goes up.
And I’ve noticed over 30 years of doing this that sometimes the bad companies go up the worst the most, because they’re short squeezes and there’s a lot of people attacking companies that – where they think they can get $2 of outperformance for every dollar because of squeezes.
RI: Yeah. So, it is, like you say, it rhymes is not exact. One thing that I did notice, and this is not a commercial, I mean, I’m not here to promote any individual securities, but since I’m a bit of an ETF wonk and love the stock market too, I looked at HDGE and some folks may be familiar, there’s been a lot of studies about how long does an investor hang in there if something isn’t going their way.
And the common response is about 6 months. There’s a company in the advisory industry in the name of Riskalyze that really use this to create a risk score.
So I went back, and I do this a lot in my articles and just in my analytics for my own portfolio. I went back and I looked at six month rolling returns of HDGE.
And I found that at the worst of it, there was a six month period where the ETF was down 40%, but the best of it, there was a six month period where it was up 50%. And of course, that, I don’t think we’ve had a 50% drawdown in the stock market since it started. So, there’s that beta or goes up more than the market goes down type of thing.
And so again, I give you those statistics really to come back to you on this issue of what do people look for when they’re trying to hedge their portfolio and I guess if you will the expectations game and maybe what you can explain to a, let’s call it, primarily do-it-yourself or audience at Seeking Alpha, where in terms of making sure that they really understand what the role of something like what you do is.
DT: Okay, so we are a reliable hedge, and when the market goes down, you can be assured that we will be there with short exposure and we’ll make you money.
Now, there are periods when the market screams up, then we’re going to lose money. And so that’s tough.
Now, in this last year or so, the bad companies are starting to decline. And I think there are statistics like 50% of the S&P is now down 40% or so. I think I’ve heard some statistics like that. Now, we are really outperforming the inverse of the index.
RI: So, let’s finish up by talking about the current market and again, feel free to separate yourself from, since you are a consultant to HDGE and Ranger, talk to us about what David Tice thinks about the markets, especially if you can, let’s put it this way, the more analogous you can be, the better, as in analogous to past periods where you said, as a noted comedian says, I don’t know it for a fact, but I just know it’s true.
I’m sure there’s a lot of things going on right now that you would say are symptoms that are not going away and that probably makes the next market crash a when not if, please speak to that as much as you’d like.
DT: Okay, so in the past, so I in a self-deprecating manner say, I’ve predicted nine out of the last four bear markets.
RI: Same, same.
DT: Now, I tend to be early, but I tend to be right eventually.
And people say, well, you’re just being defensive because you’ve been wrong a lot. And I’ll take that, but I certainly saw the ’00 bubble occurring and I was early. I saw the ’08 bubble occurring and I was early. There’s going to be a 2024, 2025 crash because this is truly a bubble.
And there’s smarter people than me like Jeremy Grantham and a number of others, Ray Dalio, et cetera. And you look at inversion of the yield curve, and you look at our massive amounts of debt that we’ve taken on. You look at this massive increase of interest rates, and they still haven’t gone back down.
There’s going to be, we’re at 29x trailing earnings. We’re starting to see consumer issues with credit card debt. And there’s going to be a decline here.
And I think that I’m a big believer of the Austrian School of Economics. And the Austrian School tends to underestimate how long that excesses can go on, but the Austrian School says the magnitude of a market decline is proportional to the excesses created during the prior boom. And we created a great number of excesses.
And therefore, there’s going to be a significant decline. And people can try to play, oh, I can squeeze out another 2% or 3%. I can squeeze out 5% or 6%, but there’s going to be a period, I believe, in the near future where we’re likely to be down 30% or 40%.
So, is it really worth the risk of adding 2% or 3% or 5%, waiting for this eventual bursting of the bubble to take place. I don’t think so.
RI: Yeah, that reminds me and I don’t speak Austrian as in Austrian economics, certainly to the extent that you do, but in a couple of the analogies that I have made, there’s an old Wall Street expression, I’m sure you’ve heard it, that the market takes the stairs up and the elevator down.
I may be dating myself, but there was a time a couple decades ago where they said, oh, we’ve done the studies and the market falls 3x faster than it rises. And that really gets me to, I was writing this down as you were speaking about it.
Maybe we’ll coin a new phrase here. So, when it comes to what you’re talking about, because this is something that, that I grapple with in the comment section of Seeking Alpha, I write about it, I try to explain it, but it doesn’t always get through, but it doesn’t mean I’m going to stop trying.
I would put it to you this way, speculation and guessing in your investment process is optional. What is not optional is awareness and having a plan to manage risk.
There are always market risks. When they come to fruition or even if they come to fruition is less important than being prepared if they do. It’s like the reason you buy life insurance, because you hope something isn’t going to happen to you when you’re much younger, but just in case.
And to me, that is where the whole, whether it’s the short side, whether it’s tactical management and rotation, a little more of the stuff that I do, or using options for that tail risk hedge. There’s so many different ways to do it.
It’s actually the focus of my work at Seeking Alpha and a lot of the stuff alongside the stock selection. But for somebody who has probably had to hear many, many times in his career, oh, you’re wrong. When in fact, no, you were just managing risk and you can’t tell the market what to do and when, please, talk to us about that because I think your perspective is as viable and as helpful to the Seeking Alpha audience as anybody I could probably talk to.
DT: So, when you’re adding short exposure to a portfolio, what you’re doing is, you’re reducing your net long exposure. So, I’m not arguing that people should go 0% equity invested, but by adding short exposure, and actually in your life you are long the economy, you are long equities, by the home you own, by your career etcetera, you’re essentially long.
RI: And I really want to thank you, David Tice, for spending the time here. And hopefully we’ll talk to you again soon. I’m glad Seeking Alpha’s audience has a chance to reacquaint themselves, because I’m sure a lot of them know you from different things you’ve done in your long and successful career. So, thanks a lot for joining us.
DT: Thank you so much Rob. Look forward to the next time.
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