Veteran value investor Murray Stahl has a surprisingly simple mantra: The best investments are the ones that everybody hates.
Thirty years ago, Stahl made the first such investment of his career, buying into General Public Utilities. The firm was the owner of the Three Mile Island nuclear power plant in Pennsylvania, which went into partial melt-down on March 28, 1979 after a cooling malfunction in one of the reactors.
As a result of this disaster, the stock of General Public Utilities lost 90% of its value. The cost of the clean-up of the debris and the decontamination of Three Mile Island was estimated at $5 billion, which the company could not afford.
‘The state could have said, “Well you don’t have $5 billion, so you go bankrupt,” but if they did that, the state would have had to take over General Public Utilities and do the clean-up. The state would have to have had $5 billion and it didn’t have $5 billion either,’ Stahl says.
‘So I thought no matter how much the media hates General Public Utilities, no matter how much the government hates General Public Utilities, the government doesn’t have $5 billion. The only thing they could do, as much as they didn’t like it, was to give the company a rate increase so it would have enough money to alleviate the problem.’
That was indeed what the government did. It was a moment that cemented Stahl’s investment philosophy.
‘The philosophy is that if people hate it, that’s really your opportunity set. It doesn’t mean that they’re wrong to hate it, but if everybody thinks it’s wonderful, for me at least it’s not an opportunity. I leave it to other people because I’m not going to learn more about it than they already know,’ he says. ‘If millions of people are following something, it might be a great investment but I have nothing to add.’
Bucking the trend
After more than three decades finding value in things that people hate, Stahl is now the chief executive of his $5.5 billion New York-based firm Horizon Kinetics. He has recently plunged into another much scorned investment – bitcoin and cryptocurrencies.
While many high-profile investors such as JP Morgan Chase chief executive Jamie Dimon and former Federal Reserve chairman Alan Greenspan have unabashedly called bitcoin a fraud – with Dimon comparing cryptocurrencies to the Dutch tulip mania of 1637 – Stahl aims to see beyond the noise and hype by examining and studying the need for and the value of bitcoin.
To defend his pro-bitcoin and wider pro-cryptocurrency stance, Stahl quotes from books such as Elroy Dimson’s Triumph of the Optimists and Friedrich Hayek’s The Denationalization of Money, academic papers on cryptography and trustless proof, statistics about the market value of a dozen world currencies and cryptocurrencies, as well as the constant regulatory developments around cryptocurrencies.
Taking back control
A central argument in Stahl’s defense of bitcoin and cryptocurrencies lies in the constant debasement of all fiat currencies around the world.
‘Take the US dollar, which in the world of fiat is one of the more successful stories. If you were alive in 1913 and you withdrew one dollar from the bank – that’s the year the Federal Reserve was established – that one dollar now has about one penny of purchasing power left,’ Stahl says. ‘So people work hard and save their money and try to raise their families – to what end?’
He also attributes the value of bitcoin and cryptocurrencies to their potential ability to eliminate the middlemen and provide enhanced cybersecurity.
‘So imagine you have a business with $1,000 of revenue and 10% profit margin, which means $100 of profit. Visa and Mastercard charge you 3% in round numbers, so 3% of $1,000 is $30, relative to your $100 of imaginary profit. That’s 30% of your profits given to credit card companies,’ Stahl says. ‘A cryptocurrency would basically disintermediate that. For Amazon, that’s roughly $60 billion of extra income that Amazon could get by using crypto. That’s a lot of money. If you use Walmart’s figures, the number would be more than $12 billion. That’s a lot of money, even to Walmart.’
Contrary to warnings about the relative ease with which bitcoin and cryptocurrencies can be hacked, Stahl believes that the underlying blockchain technology is essentially unhackable.
‘Traditional computer technologies have a single point of failure, but cryptocurrencies are based on a blockchain where ledgers are distributed, meaning there are multiple copies of ledgers – actually tens of thousands, maybe hundreds of thousands of copies. Unless they all match, the transaction will be disallowed,’ Stahl says. ‘As a practical matter, you would have to hack all the notes, which is an insurmountable challenge with today’s technologies.’
Despite the price of bitcoin having fallen from its all-time high of $19,783 per coin in mid-December last year to $9,277 as of March 12, Stahl’s initial $7 million investment in bitcoin from two years ago has still ballooned. He held around $100 million in the cryptocurrency, at the time of writing.
Almost all of Horizon Kinetics’ equity mutual funds now have some kind of exposure to the Bitcoin Investment Trust, and some funds even hold other raw cryptocurrencies such as zcash. Stahl’s flagship strategy, the $779.8 million Kinetics Paradigm fund has a 5.5% exposure to bitcoin. The $159.9 million Kinetics Internet fund has the largest exposure of any of Stahl's strategies at 28.2%, with the $14.5 million Kinetics Global fund coming in second with 22.2%.
The company is also mining bitcoins – a process which involves specialized hardware and computer power, as well as knowledge of complex mathematical algorithms – in four locations across North America.
Such dedication to bitcoin does not come without a strong conviction in its future value and potential. In fact, Stahl (pictured above) believes that the total market capitalization of all bitcoins, which is roughly $150 billion at present, should theoretically be equal to that of all fiat currencies of the world, which stands at $66 trillion. To put it in simple terms, that means Stahl believes a single bitcoin’s true value should stand at more than $3 million.
‘At the moment, there are around 16.9 million bitcoins, and there will be 21 million bitcoins in the year 2140,’ he says. ‘There will be a day some years from now when if someone bought you a bitcoin, you would think of them as the greatest person in the world. They would have done you the greatest favor.’
The next big thing
As staggering as the $3 million price tag for just one bitcoin sounds, Stahl says he is not trying to become an overnight billionaire by investing in cryptocurrencies. For him, they symbolize something as significant as civilizational change.
He explains that while bitcoin is trying to take power away from central banks, other forms of cryptocurrency and manifestations of the blockchain technology – such as Filecoin, BitClave and Lightning Network – are bringing together talents from around the world through the internet to create products and revenue sources for themselves, eliminating hierarchical institutions in the process.
‘The cryptocurrency movement is about much more than just, “Is bitcoin going to go up or down?” It’s a major civilizational change in the way human beings are going to organize themselves,’ Stahl says.
He is not worried about the volatile movements of bitcoin either, saying that much of last year’s volatility stemmed from investors who only wanted to use bitcoin or cryptocurrencies to participate in the fundraising-like initial coin offerings, selling out of them as soon as the offerings ended.
‘The whole idea of the investment was that the cryptocurrency movement is a movement basically to take the power away from the central banks. We are not going to answer whether that will be successful or not, and it might fail. We’re not going to answer that for years, so I want to wait the years,’ he adds.
Stahl believes that time will go by quickly, as bitcoin could be accepted as a form of payment among retailers and merchants within the next couple of years.
To his knowledge, his firm’s bitcoin investment has not driven away any clients.
‘Look, there are people who are not going to like bitcoin and I say that’s fabulous. Some people made a lot of money from bitcoin and they withdrew their profits – I think that’s great,’ he adds. ‘They should be the judge of how much money they are prepared to risk. It doesn’t offend me if they want to take some money out. And there are going to be some people who just don’t like the idea of cryptocurrency, and that’s fine too – that’s what makes the world.
‘I’m not offended when people disagree with me. Personally, I like it when they disagree with me, and if they have a valid reason why I’m wrong, I’m prepared to listen to it,’ he says.
‘And if I really think I’m wrong, they can convince me, but I don’t get offended at all. I think it’s wonderful.’
Head of investment research, Citywire
Stahl is candid about the fact that his investment style isn’t going to be to everyone’s liking. In fact, he seems to like it that way.
There is a great deal of risk in cryptocurrencies, but Stahl’s investment in them has been a major factor in why he is outperforming the S&P 500 over the past three years. While the 10-year picture is less impressive, his career record on the Paradigm fund certainly is, and he has clearly not lost his appetite for investing off the beaten path.
A high conviction investor for a new age? You decide.