Dan Ferris - What We Do In The Markets, It’s An Unnatural Act…You’ve Got To Have Some Discipline | #179

Episode Summary

Executive Summary: Dan Ferris discusses his path from guitarist to value investor, emphasizing a bottom-up but cycle-aware approach built around business quality, valuation via price-implied expectations, and disciplined selling. He highlights key screens, the importance of capital allocation, selective use of trailing stops, and several long-term holdings and recent ideas like Altius Minerals, Starbucks, and Dollar General.

Main Topics: Ferris’s origin story and transition into finance (Priority: 5/5): Ferris explains how a back injury ended his guitar ambitions and led him to write Bill Bonner, ultimately entering financial publishing and investing, first through gold and natural resources. Investment framework: bottom-up value with cycle awareness (Priority: 5/5): He describes evolving from commodity/speculation thinking toward fundamental, one-company-at-a-time analysis while maintaining strong respect for market and industry cycles. Valuation through price-implied expectations (Priority: 5/5): Ferris prefers Michael Mauboussin/Alfred Rappaport-style expectations investing over traditional DCFs because it anchors valuation to what the market price already assumes. Five financial clues and business quality screen (Priority: 5/5): He outlines the key characteristics he seeks: strong free cash flow, consistent margins, sound balance sheet, shareholder rewards, and attractive returns on equity. Selling discipline and trailing stops (Priority: 4/5): Ferris admits value investors often sell too early when stocks look expensive; he now uses trailing stops on some positions to reduce emotional decision-making. Case studies: Altius Minerals, Starbucks, Dollar General, Boeing (Priority: 4/5): He uses specific holdings and watchlist names to illustrate patience, capital efficiency, and situations where the market may be too pessimistic or where management quality matters. Influential books, learning, and research resources (Priority: 4/5): Ferris recommends foundational texts like The Intelligent Investor and The Most Important Thing, plus newer works on models and success, and stresses reading SEC filings first.

Key Arguments: Great investing starts with identifying good businesses, not just cheap stocks; valuation alone is insufficient without quality and capital allocation. Traditional DCF models are overly sensitive to assumptions, so he prefers a framework that asks what future growth is already embedded in the current share price. Cycle awareness improves bottom-up investing by preventing investors from treating a single company as if it exists in isolation. Consistent margins, even if thin, can signal competitive strength because in capitalism abnormal profits should attract competition and erode over time. Good balance sheets come in different forms: some companies should have net cash, while others can prudently carry debt if cash generation and coverage are strong. Shareholder rewards matter because once a business has reinvested all productive capital, excess cash should often be returned via dividends or buybacks. Selling should be more mechanical and less emotional; if a business remains excellent, selling simply because it seems expensive can be a major mistake. In mining, royalties and prospect-generation models are superior to operating mines because they are capital-efficient and avoid the worst parts of the industry. Long-term investing rewards patience; some positions should be held for years if the business continues to compound and management remains disciplined. The best resources for investors are primary sources: annual reports, 10-Ks, 10-Qs, and original company filings, before reading promotional narratives.

Data Points: Average days held: about 1,100 days - Ferris says this is the average holding period in Extreme Value Number of names in portfolio: 17 names - Current recommendations in Extreme Value, including post-spin holdings Potential comfortable portfolio size: close to 30 names - Ferris says the strategy could likely expand into the 20s without issue Microsoft share price at recommendation: about $20–$25 - Ferris recalls recommending Microsoft in 2006 Microsoft sale price: in the $40s - Ferris says he sold too early and the stock later rose much higher Altius Minerals market cap: about 550 million Canadian dollars - Ferris checks the stock live during the conversation Altius Minerals annual guidance: mid-$70 million per year - Ferris references latest guidance for royalty revenue Altius valuation multiple: single-digit multiple of royalties - He contrasts this with precious-metals royalty companies that trade at much higher multiples Precious-metals royalty multiple: 15x to 20x royalties - Ferris cites typical valuation for precious metals royalty businesses Starbucks stock performance since recommendation: up almost 90% - Ferris says the pick was made the prior August Boeing peak share price: about $440 - Ferris notes the stock had fallen into the low $300s Boeing revenue decline: down 30% or so - He cites the recent quarter as evidence of severe stress Boeing compensation/charge figure: about $5.0+ billion - Ferris references charges tied to 737 MAX customer compensation One-in-prospect success rate: 1 in 3,000 - Ferris explains why mineral prospect generation is highly risky and requires diversification Potash royalty runway: 1,700 to 1,800 years - He describes the enormous duration of the underlying resource at current production rates Dollar General store footprint: around 50,000 square feet - Ferris contrasts DG with Walmart’s much larger stores Walmart SKU count: about 150,000 items - Used to illustrate Walmart’s scale compared with Dollar General Portfolio outcome of early commodities trading: $2,000 down to $268 - Ferris’s first trading experience in commodities, a formative loss Discount rate/compounding example: 10% for 50 years = 100x - Meb uses this to illustrate the power of long-term compounding

Pivotal Quotes: "I don't know the future, Meb. And I don't know anybody who does." — Dan Ferris: Explaining why he dislikes conventional discounted cash flow forecasting "The untrained security buyer should never put money into a low-grade enterprise on any terms." — Dan Ferris: Citing Ben Graham as a guide for avoiding troubled businesses until they become cheap enough and understandable enough "The biggest change I've made is that, indeed, looking at research that shows that if Extreme Value had used trailing stops, it would have gotten better results." — Dan Ferris: Discussing how he improved his selling discipline

Implications: Listeners should focus on quality, capital allocation, and realistic valuation anchors rather than forecasts. Long-term compounding, patience, and disciplined exits matter as much as finding bargains, especially in cyclical or speculative sectors.