Stansberry Research

Investing With a Funhouse Mirror

Dan FerrisStansberry Digest

A Netflix-worthy American saga... One family, three big fraud cases... Jim Rogers on company insiders... Warren Buffett on bad board members... Did Tesla stage a 2016 video? Do investors even care?... Investing with a funhouse mirror...

Arthur Belfer left Poland at just the right time...

In his early 30s, Belfer sold down and feathers in Kraków, Poland. He was just trying to get by like everyone else.

Then, in 1939, Belfer went to the U.S. on a business trip.

Upon his arrival, Belfer got word that the Nazis had invaded Poland four days earlier. His Polish money was now worthless. And he was stuck in a foreign country.

This is where the Belfer family's decadeslong American saga begins...

First, Belfer convinced a New York broker to buy feathers from Europe. That allowed him to create the Belfer Corporation. The company made down sleeping bags for the U.S. military.

By the early 1950s, Belfer added foam rubber and petroleum products to his empire. Then, in 1962, the company – called "Belco," for short – went public.

In 1983, Belco merged with Houston-based InterNorth. And Belfer's son, Robert, became the chief operating officer of the new company, BelNorth Petroleum.

Now, you might think today's Digest reads like a Wikipedia entry so far. But it's a great American success story – at least to this point...

The penniless, scrappy immigrant arrived in the promised land as war ravaged his home country. He pulled himself up by his own bootstraps and built an American empire.

If you throw in some good dialogue, sex scenes, authentic period costumes, and empire-building montages... this saga would have serious Netflix potential.

Well, maybe not.

Not even Netflix could dream up the dramatic, heartbreaking setbacks in Belfer's story...

You see, BelNorth merged with Houston Natural Gas in 1985. As part of the deal, the company changed its name to...


Yup, that's right. So you can probably guess where this American saga is headed next...

Belfer and his family became major Enron shareholders after the merger. And Robert Belfer joined the company's board of directors. (Then, Arthur Belfer died in 1993.)

The thing is... the Belfer family never sold its Enron shares.

You know what that means...

Enron went bankrupt in 2001 after company officials committed fraud. The bankruptcy wiped out billions upon billions of shareholders' money – including a substantial part of the fortune that Arthur Belfer built from scratch starting in the late 1930s.

The Belfer family's Enron stake peaked at roughly $2 billion in value. And almost overnight, it all evaporated. One family friend told the New York Times in December 2001...

[Robert] said he was depressed and felt stupid – as if the whole world was looking at him.

Still, at that point, the Belfer family had spread its money into other assets. So even after they lost $2 billion with Enron, Forbes magazine estimated their wealth at $110 million.

That's not "before Enron wiped us out" rich... But the family was still wealthy.

Then, the Belfer family's American saga took another dramatic twist...

After Enron's collapse, the Belfers withdrew $28 million from another investment...

Bernie Madoff's Ponzi scheme.

See, I told you that Netflix couldn't even make up a lot of this stuff.

We all know how Madoff's story ended...

He pleaded guilty in March 2009 to 11 federal felonies, including securities fraud and wire fraud. And he eventually spent the rest of his days in prison before dying in April 2021.

The Madoff bankruptcy trustee sued the Belfer family to try to get back the gains they realized when they withdrew from the fund. It's not clear how that lawsuit turned out.

But one thing is clear...

This poor family invested in two of the biggest frauds of our time.

Actually, make that two frauds and one alleged fraud...

The alleged fraud I'm talking about is now-bankrupt crypto exchange FTX.

According to the Financial Times, two investment firms linked to the Belfer family put as much as $34.5 million into FTX. Of course, their stake is now likely worthless.

And yet, the Belfers are still wealthy. They've also earned a reputation for giving a lot of money to various philanthropic causes – more than their estimated $110 million net worth after Enron collapsed.

The Financial Times implies that the Belfers were lucky to withdraw money from Madoff's Ponzi scheme at the right time just because they needed the cash after Enron crashed.

In other words, if they hadn't lost $2 billion in the Enron fraud, they would've lost at least tens of millions in Madoff's fraud. Like Roseanne Roseannadanna used to say on Saturday Night Live...

If it's not one thing, it's another.

Now, the Belfers were outside investors in Madoff's fund and FTX. So we'll be nice today and consider those two missteps as simply bad luck.

But we can't do the same with Enron...

In that case, the Belfer family lost $2 billion in a business they had been in for decades.

They knew the business well. Heck, they probably knew the inner workings far better than almost anyone else in the world. And Robert Belfer was on the board of directors!

It reminds me of something renowned investor and author Jim Rogers once said...

Get inside information from the president and you will probably lose half your money. If you get it from the chairman of the board, you will lose all of your money.

Now, Robert Belfer was neither Enron's president nor the chairman of its board of directors. But I think the saying still fits. He was a high-ranking insider and still didn't see it coming.

Rogers is right...

The highest-ranking folks in a company don't often know as much about their business as you think they should. And no matter what they know, they're more likely to just tell the public what it wants to hear rather than what's truly important.

This American saga might have another darker lesson for investors, too...

As legendary investor Warren Buffett pointed out in his 1993 letter to Berkshire Hathaway shareholders...

Directors can do great violence to shareholders while still claiming to be acting in their long-term interest.

A 2002 Washington Post article suggested that Belfer wasn't a very demanding board member.

He voted to suspend conflict-of-interest rules in June 1999. That allowed Enron Chief Financial Officer Andrew Fastow to set up the off-balance-sheet partnerships that got the firm in trouble.

That move sure did "great violence to shareholders," didn't it?

Belfer was described in the Washington Post as "reticent by nature." The article also said that he didn't take an "assertive posture" on Enron's board.

I'm not saying Belfer did anything criminal at Enron. I'm just saying he could've been a better board member.

Then he might've preserved at least some of what his father built before the company went bankrupt and its stock (and his family's stake) became worthless.

Remember, even before Enron, Robert Belfer was BelNorth's chief operating officer. He knew the business from the inside out. But for whatever reason, being an oil industry veteran and board member did him absolutely no good when the rubber met the road.

I won't waste any more time today on the Belfers' investment with Madoff.

Since that was the biggest financial fraud in history, many people got caught up in it. And as I said earlier, the Belfers were merely outside investors like the rest of them.

But the Belfer family's FTX investment feels like an example of what I said last week...

You can run from the biggest mega-bubble in all recorded history, but you can't hide...

Eventually, the mega-bubble infiltrates the lives of absolutely everyone.

Keeping your money in financial assets and expecting to avoid the mega-bubble is a winless battle. It's like occupying the safest space on the Titanic...

At some point, you're going down. It's just a matter of whether you get into a lifeboat or freeze to death trying to float on your own for hours in the 28-degree water of the Atlantic Ocean.

Maybe you think I'm not giving the Belfers enough credit...

After all, they just took risks like many other folks. Arthur Belfer built a business from nothing. And the family managed to hang on to part of a great fortune despite huge losses from multiple frauds.

Plus, as I said, they seem like a generous group of people. They've given a lot of money to charities and other philanthropic endeavors – like the Metropolitan Museum of Art.

I like art, so I'm grateful to folks like the Belfers who help to keep all the art museums open. They've done well in business, and they've done some good as a result.

I also don't mean to suggest that I think the Belfers are stupid. That would be too facile of an assessment. They built an empire, took some painful hits, and are still standing.

Ultimately, I've shared the Belfer family's saga for one reason...

It shows us how insidious fraud can be. It proves how absolutely anybody can get caught up in it – even company insiders who you think would know better.

As the Belfer family's saga shows, the path to great wealth can be paved with horrendous trials and tribulations...

The future is unpredictable.

And that's not merely because you can't always see where you're headed. It's also because you can't see where the path you're on will take you...

I made it clear in my first Digest of 2023 last week that I'm as bearish as ever on the stock market. And I suspect the market will find new lows in the weeks and months ahead.

But I don't pretend to know the path the market will take to get there...

The path to "lower lows" in stocks could easily contain a huge rally. Or the path to "higher highs" could easily contain a huge drawdown to a multiyear bottom.

The path's twists and turns make long-term investing hard...

Long-term investors want to stay the course and compound at high rates over a period of years or decades. But the path trips them up...

The drawdowns scare these folks into selling out for losses. And the market "melt ups," bubbles, and mega-bubbles entice them into buying the wrong stocks at the wrong times.

On this week's episode of the Stansberry Investor Hour podcast, we talked about the market's path...

Our guest was investor and social media guru Michael Gayed.

Gayed manages the ATAC U.S. Rotation Fund (RORO), the ATAC Credit Rotation Fund (JOJO), and the ATAC Rotation Fund (ATACX). And he posts on his Twitter account daily.

To my point, Gayed is one of the few investors I've heard talking about the path lately...

Like me, he emphasizes the folly of basing your capital-allocation decisions on your ability to predict markets. Gayed would rather assess the probability of various outcomes through current market conditions.

Those conditions change constantly. And so do Gayed's views on what's likely to come next.

Right now, Gayed believes the conditions favor a substantial rally in stocks – a "melt up." But at the same time, he thinks they also favor what he calls a "credit event," meaning a debt-market crisis.

Now, that might seem contradictory. But that's the whole point.

It's all about understanding that the market's path is unpredictable.

The conditions are what they are. And we can all make guesses about the path's direction. But nobody really knows where it will lead us.

Some people handle the market's path like pros. They buy during bear markets and stay invested for the long term.

Folks with modest incomes and a lot of time and patience can amass a fortune that way. Buffett has often said that it's not hard to get rich in stocks as long as you're not in a hurry.

But as investors today, we're all flying blind and headlong into God-knows-what...

The Belfers have survived three crazy chapters of a decadeslong saga.

Good for them.

However, in the coming months and perhaps years, I bet many more Belfer-esque tales of fraud-induced losses lie ahead. I don't think we've seen even half of the fraud and utterly insane shenanigans that will ultimately be outed by the collapsing mega-bubble.

It should surprise nobody, for example, if electric-vehicle maker Tesla (TSLA) one day finds itself embroiled in a fraud case. I know short sellers who will tell you that CEO Elon Musk has already committed blatant fraud by making promises that couldn't possibly be fulfilled.

In fact, the story might've already broken...

On Tuesday, news service Reuters said a Tesla employee recently said on the record that an October 2016 video demonstrating the Model X's self-driving features was staged.

The first thing you see in the video is text that reads...

The person in the driver's seat is only there for legal reasons.

He is not doing anything. The car is driving itself.

And when the video was first posted on Tesla's website, Musk said on Twitter...

Tesla drives itself (no human input at all) thru urban streets to highway to streets, then finds a parking spot.

Not doing anything. No human input at all.

The video shows the Model X's self-driving capability stopping at a red light and then going at a green light. There's a big problem, though...

The Model X's system didn't have those two features at the time.

That's according to Ashok Elluswamy, Tesla's director of Autopilot software.

Elluswamy was questioned last July as part of a lawsuit filed against Tesla over the 2018 crash that killed Apple (AAPL) engineer Walter Huang. And Reuters released the details this week.

Want to hear something even crazier?

As I said, Reuters published Elluswamy's testimony on Tuesday. And you might think that allegations of a staged event would wreck Tesla's stock.

Not so fast...

The company's stock actually gained more than 7% that day. And despite an up-and-down few days in the broader market, the stock finished up roughly 8% this week.

That's bonkers...

An employee in a position to know exactly what he's talking about says on the record that the company staged an event. And instead of being the latest blow in Tesla's long fall... the stock rises on the day of the allegation and then goes on to post a positive week.

If investors were truly smart and looking to sell all the high-flying, overhyped garbage of the mega-bubble, anything remotely close to fraud allegations would crush the stock. If that were the case, it should be down 10% (or perhaps more) this week – not up around 8%.

Tesla is still way overvalued. And it will likely trade at least 50% lower than today's levels.

But to be fair to anyone who bought the stock while it was flying high in 2021, investing in a mega-bubble is tough...

It's like trying to paint an accurate full-length portrait of a human by looking only at their image in a funhouse mirror.

You can try to adjust for the distortions all you want. But the image you create won't look right in the end. You'll be misrepresenting reality, not accurately reflecting it.

You just can't know how tall, short, fat, or thin your subject really is until you see them in person – or at least in a picture that's not distorted.

Using an accurate image to paint is hard enough. Using an image from a funhouse mirror is essentially impossible.

But that's exactly what investors like the Belfer family did when they put money into the likes of Enron, Madoff, and dozens of other frauds throughout history. It's what they did when they invested in all the overhyped cryptos and other tech garbage in 2020 and 2021.

The list goes on... FTX, the education website Frank we mentioned last week, and more.

My point is...

Investors become untethered from basic investment principles during a mega-bubble...

They forget about simple stuff like doing plenty of due diligence before investing in a radical, newfangled thing like a crypto exchange. All of FTX's investors, for example, seemed to avoid insisting on at least an adult or two in the company's management team.

They also forget about fundamental investing principles, like the fact that valuation determines your return. If you pay $10 for $1 of earnings, you'll make twice as much as if you paid $20 (all other things being equal).

Scores of people have forgotten about that. Instead, they've become enamored with companies' revenue growth rates – whether they were profitable or not.

It's hard for me to believe investors have really gotten a clue about any of those basic fundamentals yet...

For example, our friend Jason Goepfert and his team at sent their latest e-mail to subscribers on Wednesday morning. It was titled, "Dumb Money Confidence breaks out," meaning that the most naïve investors in the market remain plenty bullish.

I won't share Goepfert's "secret sauce" in this Digest. That's for his paying subscribers only.

But let's just say that his data shows that the market's worst investors are as confident today as they were in November 2021. You might recall that's when perhaps the three biggest destinations for dumb speculative money – bitcoin, the tech-heavy Nasdaq Composite Index, and the small-cap-focused Russell 2000 Index – all peaked.

To be fair, Goepfert's data also says that recovering confidence after a big downturn is genuinely bullish.

I don't believe that's the path the market will take in the near term. But we'll see.

The path to future losses and returns is unpredictable. But as Gayed said during our Investor Hour interview, we can assess the probabilities of various outcomes based on the current market conditions and widely available data.

That's exactly why I've urged all of you to "prepare, don't predict" so many times.

You or I will never predict the market's path. But the thing is... we don't need to even try.

We simply need a diversified portfolio that will perform well enough no matter what happens. It doesn't matter whether the bear market continues or a new bull is ready to run.

As long as we're holding great stocks bought at sensible valuations, plenty of cash, and some gold and silver...

We'll all be OK in the long haul.

New 52-week highs (as of 1/19/23): Novo Nordisk (NVO).

Today's mailbag features feedback on our colleague Dave Lashmet's essays this week about Musk, Twitter, and SpaceX (here and here). What do you think? As always, e-mail your comments, questions, and observations to [email protected].

"Wednesday's Digest includes a poor analogy. Fans go to the stadium to see the players play football. No one goes to Twitter for the moderation. Firing the football team is not like firing the moderators. Twitter users go for content and a chance to pop-off. Advertisers go to Twitter for the users.

"Firing moderators is analogous to installing more bathrooms. Football fans don't love standing in long lines to [go to the bathroom] and Twitter users don't love moderation. Long lines to [go to the bathroom] and moderation are the least favorite aspects of stadium users and Twitter users, respectively. People likely avoid both venues for these very reasons. Canning the moderators improves Twitter for the users and, therefore, for advertisers." – Paid-up subscriber Paul J.

"... It's strange that after a few months and firing three quarters of the 'team' at Twitter, it is still going and open for business. No down time that I am aware of because I suspect everybody would have read about it from writers like yourself.

"There is no company out there that is even close to doing what SpaceX does. Blue Origin has been to the edge of space for a total time of 10 minutes for a flight. Whatever.

"I have always been under the impression that Starlink was going to be for rural areas (my area), where fiber infrastructure cannot get to, not cities." – Paid-up subscriber Paul H.

"Dear Mr. Lashmet, I am sure that there in Seattle you can get all of the high-speed Internet you want from multiple sources. Where I live in the mountains in rural western New Mexico, there is no fiber, no DSL, nor even reliable cell signal. We did have satellite Internet for several years from one of the legacy suppliers, but it was very slow and the latency made it very difficult to accomplish any serious work.

"Since subscribing to Starlink last year, we have fast, reliable, unlimited Internet service that allows us to stream TV, use our cell phones over Wi-Fi and actually work over the Internet. The same goes for many of our neighbors that now have Starlink. It works, and it works well.

"It is my opinion that Starlink was cut from the rural broadband program not because they did not accomplish the goal of providing reliable broadband to rural America, but because the current administration does not like Musk's politics. I have not seen our local telephone company or anyone else making any effort to improve the availability of broadband Internet in our rural area, but Starlink has filled the need." – Paid-up subscriber Rodney A.

"Thanks for the article. It was a good economic assessment of the situation. Perhaps there are some things more valuable than money – freedom? I don't know Elon's full motivations, but the issue of censorship and government control of the media appears to be a significant factor... I hope that we cherish our liberties more than our pocketbooks." – Paid-up subscriber Brad J.

"I live in Canada and have great respect for Elon Musk. He has probably done more for our freedom than any other individual. He is also paying a heavy price. The mainstream media is attacking him and his cars since he bought Twitter. Freedom isn't free." – Paid-up subscriber Steven M.

Good investing,

Dan Ferris
Eagle Point, Oregon
January 20, 2023