 Okay, I'd like, it's my great pleasure to introduce our next speaker, Stephen Richard Berger. Mr. Berger is a managing partner of Adamus Partners, which he co-founded in June of 2000 and is in the process of converting into a family investment office. In the past, Mr. Berger served as the director of the Care Group Board of Managers Investment Committee, as a non-trustee advisory member of the Dartmouth College Investment Committee, as chairman of the Father Flanagan's Trust Fund Investment Board for Boys and Girls Town, and a board member of the Princeton University and University of Virginia Investment Management Companies. He is currently a member of the Mises Institute Board of Directors. Mr. Berger graduated from Princeton University in 1976, Magna Cum Laude, with a BA in English Literature, received the JD from the University of Virginia Law School in 1979, and served as a labor law associate at Nutter, McClellan, and Fish from 1980 through 1984. After a year of general law practice at Davis Colfow, in 1987, Mr. Berger graduated from Amos Tuck Graduate School of Business Administration at Dartmouth College as a Tuck scholar. So without further ado, I will introduce Mr. Berger, who will speak to us today on Defending Securities Markets Undefendables. Thank you. The title of my talk, Defending Security Market Undefendables, pays homage to one of my heroes, Walter Block, Professor Block, I think will be at Mises University the rest of the week, and he's one of my heroes because I really consider him the heir apparent along with a few other candidates, including Joe Salerno to Murray Rothbard, who you all have heard a lot about this week. Walter, like Murray, has a great sense of humor. He has an insatiable thirst for knowledge, his publication pace is kind of second to none, although he would claim, as he's told me at many lunches and dinners, that he was embarrassed by how prolific Murray Rothbard's output was, but I think Walter nonetheless holds a great standard in that regard. One of his seminal books, Defending the Undefendable, and I've kind of used that book as a framework for my talk, looked at a lot of so-called dregs of society, whether it was slumlords, insurers, blackmailers, price gougers, and what Walter did in this book was he held the activities of those often maligned economic actors up to the light of libertarian justice. So he was trying to ascertain whether their conduct violated the non-aggression principle and if it didn't, why it didn't, and secondly he went on to examine whether in each of those cases and many others, whether their activities actually had beneficial economic effects, so in many dimensions, their activities could be considered moral as well as legal. Here's a main quote from that book by Walter in which he says, the chief point I wish to make is that there is a crucial difference between the initiation of aggression and all other acts, which while they may displease us, do not involve such aggression. This really was the gravamon of Walter's analysis in each of the cases that he looked at was that in all of these cases, he tried to illustrate why the activities of the alleged economic actors did not violate the libertarian principle of non-aggression. He tried to show why they didn't and in many cases, as I indicated before, he also indicated why their activities could be considered moral, but his main point was that just because an activity is a moral, that does not mean that it should be against the law or considered a crime within a libertarian concept of justice. So let's flip again the page and I wanted to look at some of the rogue's gallery in the investment world of characters who are often maligned, often face insuperable odds of success and in many cases, in my view, are castigated by what I would call the unholy trinity of mainstream media, politician, and entrenched corporate management. So here's a list of some of the so-called bad economic market actors that I'm going to look at. Category one is bears, also known as short-selling. Category two would be vulture investors. Those are investors that are involved in purchasing securities of bankrupt companies, distressed bonds, or distressed assets. Three are corporate raiders involved in either hostile corporate takeovers or accumulating positions that enable them to have an activist influence on a corporate management. Three which I would call kind of cousins of corporate raiders are geckos, Gordon gecko, not the Geico mascot who often act on specialized research or inside information. And then another cousin of the geckos, which would be merger arbitrageurs. I'm going to spend the bulk of my time on the first three categories because I would also like to take a look at what I consider the true rogue in the investment world and then leave time for Q&A. So let's flip to the next slide and look at first category, short sellers. First of all, just to quickly explain what short selling is in case some of you don't know. I'm assuming most of you do, but just quickly a short sell is an investment bet on the decline of a security price. It could be an equity security or a bond security, but at bottom it's a negative bet that an investment asset will decline in value. The way that transaction is implemented, it's actually a debt transaction where the short seller goes out in the open marketplace, borrows the security from a security broker, lends it to him. The short seller then sells that security in the open market, gets cash back and invest the cash in short security instruments, typically T-bill type investments, and he splits the income on those T-bills with the lender, the securities. At some point, the short seller is obligated to close the loan by going back into the open market, buying that security back, and his profit or loss is the difference between what he sold it at on that initial transaction when the short sale was implemented and the point at which he covers the transaction by buying it back. So that's how short selling works. Oddly enough, in most consumer markets, if you consider yourself going to the grocery store, most people seem to prefer lower prices. You would like to go to the grocery store and have a lower price of meat, produce, vegetables, beer, and alcohol. Everyone would like lower gas prices, but oddly enough in the securities market, most participants on the sidelines, most commentators, seem to root for high prices and love bull markets and live in dread of declining prices and deflating markets. Because of that kind of dread of declining markets, the short seller who is betting on a security price to fall is often depicted in very harsh terms. On this page, I show some of the malignant comments hurled the way of short sellers. They've been called icky, kind of probably a polite term. Herbert Hoover presided over the economy as it slid into the crash in Great Depression, called them unpatriotic. Napoleon Bonaparte, who was upset about sovereign debt being shorted, called short sellers treasonous and traitorous. After the 29 crash, the securities and exchange commission was created. And before its creation, there were a number of congressional hearings in which short sellers were blamed for the market crash with Jesse Livermore, a well-known trader getting a lot of the blame. Back in 2008 and 2009, the great financial crisis that plagued the US and the rest of the world for 2008, many other countries had short selling bans that lasted for much longer. Elon Musk, whose stock has actually gone to parabolic heights, has been in a constant battle with short sellers. And he's called them jerks who want us to die in extreme torture. And I don't have one on this page, but back in 1999, 1995, excuse me, the finance ministry of Malaysia was so upset about short selling that they actually had proposed, but I don't think enacted, that short sellers be subject to caning. OK, if you flip to the next page, I actually think that short sellers should be considered market heroes instead of market rogues. Short sellers in the process of their research actually have been quite efficient at exposing corporate fraud, fads, failures, and accounting regularities. I list a few of those examples here. Enron, Lehman Brothers back in 2008, Allied Capital, Valiant Pharmaceuticals, and just more recently in the news last month, literally, was Wirecard, a German payment processor that ended up being a gigantic fraud, $2 billion of cash was missing, it's alleged, who have had fictitious accounts and having been involved in money laundering, and interestingly enough, at one point, during the whole Wirecard saga, which lasted for several years, the German regulator Bofen actually at one point banned short selling in Wirecard. And at another point, when the Financial Times investigative journalist raised a number of red flags about Wirecard, the Bafin, which is the German equivalent of the SEC, instead of investigating Wirecard, Wirecard actually launched an investigation into the Financial Times journalist, yet another example of how short sellers fight an uphill battle, but the stock recently crashed to virtually pennies on the dollar, and the company filed for insolvency, and it's been a major embarrassment for the main financial regulator in Germany and a main embarrassment for the German stock market because it's one of the, it had been one of the constituent members of the DAX index, which is the German equivalent of the S&P 500. Other things that short sellers do, they provide buying power at market bottoms because eventually, as I mentioned before, a short seller at some point goes back into the market and covers the security when he thinks it's fallen enough in price. So typically, when a market is crashing, there's all kinds of panic selling and a short seller at that point will often cover his bets, and that provides kind of a floor to the stock market declining, so they actually provide liquidity often at market bottoms. They impart a lot of informational value to long investors. They lower the investment costs for long investors because someone who lends out their security often will split a fee, get a fee for lending those securities out, so they make the cost of investing for a long investor less than it otherwise would be. They also, in my view, face really heavy odds in what they're doing, so I consider them their activity to kind of be heroic because they're likely underdog in the stock market world. Shorting stocks is a very hard and difficult business. When you go long an asset, let's say you buy shares in Amazon, which has been a hot stock. Buy shares in Amazon, the most you can lose is 100%. The stock can literally go to zero if it goes bankrupt, so that's kind of the maximum loss, but if you're long Amazon, the upside is virtually unlimited. You can have close to an infinite return. It can keep going up and up in price. For short selling, the risk reward is totally flipped on its head. The most you can make is 100% if the stock collapses and goes to zero, whereas when you're long something, you can make several hundred percent or even more. You can make 10 baggers, so much higher reward on a long investment. The most you can lose on a long investment is 100%, but for shorting, your loss is actually infinite because the stock can keep going up and up and up and up and you have to buy it back at that super high price and your loss could be close to infinite, so it's kind of an asymmetric risk reward versus being something long, which in my estimation makes someone who does short selling, it's a very bold type of investing that should be applauded. They also are subject to de jure and de facto bans, de jure means a law has been passed prohibiting short selling de facto ban is kind of what's gone on since 2008, which is the Federal Reserve and the other central banks keep printing money. It's called quantitative easing, but round after round quantitative easing inflates markets, inflates securities prices and a short seller who's betting on something declining in price constantly has to wage war against this huge weight of the Federal Reserve behind security prices rising. Okay, let's look at another type of so-called investment in a rogue, vulture investors. A vulture by definition is a contemptible person who prays on or exploits others. In the investment world, a vulture is someone who buys securities and bankrupt companies or other distressed assets or from distressed sellers. He typically is buying those securities that sense on the dollar. A company files for bankruptcy. We can use Hertz as a recent example. It was unable to rent cars during the COVID pandemic, had a big debt load, has really hardly any revenues coming in as no one's traveling, no one's renting cars and Hertz could not pay off its interest on its bonds and filed for Chapter 11 and the prices of its securities collapsed in value. So what a distressed bond or vulture investor does at that point is they come in and they provide a valuable source of liquidity to people holding the bonds. The previous holders tend to be investment grade bondholders, insurance companies, pension funds or in the case of retailers, it could be trade suppliers that are supplying goods and services to the retailer. Those investors typically want their cash back now. That's their time preference. They have very little interest typically in being involved in a protracted bankruptcy proceeding because when you go into bankruptcy, the payment of any interest and principal on bonds is suspended. Everything is held in abeyance and it becomes up to the bankruptcy court through a long process to figure out who gets paid what and how the company will be restructured. So a distressed bond investor actually is taking those people out of their position and even if it's at 20 cents on the dollar, those sellers to the distressed bond investor would prefer that cash now than the uncertainty of a payment. It could be less or more, but after a complex proceeding might take two to three years to get resolved. So as I mentioned on this page, their specialized expertise in refinancing prowess can accelerate the emergence from distressed. And it does that because it's kind of a small community of investors that are involved in bankruptcy bond investing. So you're basically transferring the assets and who holds the bonds from a diverse group of mutual funds, insurance companies and trade claimants, kind of a very diverse group of bondholders with kind of zero knowledge and expertise in this process to a concentrated group of holders that are quite skilled at figuring out how the company can be restructured and put on a sound footing. They too, like the short seller, face lots of hurdles to succeed. As I mentioned here, some of these hurdles include the fact that impaired assets and companies can be difficult to turn around. It's a time-staking process not easy to do. Secondly, intercredit should be complex. The way a distressed bond proceeding works is you have certain holders that are buying up secure debt, certain holders buying up bonds that are junior in security, and then some might even take a stab at the equity of preferred securities. And each of those groups have different opinions on what the company's worth and how it should be restructured. And then finally, the process can involve lots of arcane legal, regulatory, political and environmental issues. A case in point, which has been in the news a lot the last 12 months to two years, has been Pacific Gas and Electric, which was the large utility exposed to the California fires. It filed for bankruptcy. Multiple billions were at stake, and there were numerous parties involved in this, including the senior bondholders, junior bondholders, the group investing the victims of the fires, equity holders. And it was a long drawn-out proceeding, but the company has finally emerged from bankruptcy with the blessing of Governor Newsom in California. Let's look at the final category I think we have time for, which are corporate raiders and takeover artists. The popular image in cinema and in real life are characters like Gordon Gecko and Wall Street. Ivan Boski and Michael Milken, who were famous or infamous during the 1980s for junk bonds, leveraged buyouts, and the whole takeover mania that occurred then. And more recently, Carl Icahn has been quite active in taking over companies, and then another activist investor in the news a lot has been Paul Singer of Elliott Associates, whose firm has been involved in trying to rearrange many companies by accumulating enough shares in the situation to influence corporate management. So the corporate raiders and takeover artists like short sellers and vultures often attract a lot of adverse to media attention. Politicians are often arguing against them. Unions are against them. Regulators, all kinds of constituencies try to paint them as kind of short-termist evil investors looking to make a quick buck. The reality is that the market for corporate control in my judgment, and that of many Austrian economists, is highly advantageous. It's a tonic to corporate management. They're often entrenched in inefficient. The threat of their displacement by corporate raiders can often pressure management tax in the interest of stockholders. Thirdly, corporate management often can excel in kind of business operations decisions, but are often poor at capital allocation decisions, decisions such as making mergers and acquisitions, when to do spin-offs, when to pay a dividend, when to buy back stock. And you'll often find that a activist investor or takeover artist will come in and have a different plan on not only how the company should be run, but how the capital should be allocated, how any cash flow should be dispersed within the corporation. They too, like the vulture investors and short sellers, are often up against tough odds of success. Firstly, they have to pay a rich takeover premium to effectuate taking over a company. The premiums can be anywhere from 30 to 50%. Secondly, they're just trying to be an activist investor to influence the process. It's often painstaking drawn out process to accumulate shares. There are lots of laws on kind of notifying other shareholders when you pass a certain threshold of shares own. So it's a very difficult process to kind of become an activist, to accumulate those shares at kind of a price that will still make sense. And then finally, if you're wrong, which everyone can be, being a corporate raider or activist investor can kind of become like a roach motel. It's kind of easy to get into, but impossible to exit if you're wrong because you are often left holding a large amount of shares that become an overhang on the stock. And so if you change your mind, it can be very difficult to unwind your position. But in spite of kind of all of those obstacles to success, corporate raider, takeover artist, activist investor, that bottom thinks that the ultimate reward of coming in and buying a company that's cheap in price, that has a lot of embedded value, is kind of worth all of these obstacles. Let's flip the slide. I won't spend too much time on this page, but there are a couple of other categories in the investment world that are kind of related to corporate rating activities that also encounter a lot of adverse press and demonstrations from politicians. One would be traders that operate on kind of inside or specialized information. Another would be merger arbitrageurs who are kind of betting on whether a takeover deal will happen and are trying to play that spread. And the questions I pose here, which really would kind of take up an entire lecture in themselves, would be whether any of these activities, especially inside trading, do they violate the non-aggression principle of libertarianism? I would also look at what kind of risk they face and whether their presence kind of enhances market liquidity and the market process of imparting information quickly and efficiently to security prices. Okay, let's look at who I think is the ultimate rogue in the investment world but is often painted as the hero of the investment world. Not surprisingly, in my judgment, the Federal Reserve is the ultimate rogue in the investment world. The media would have you think that they have been the savior, that their activities are bold and innovative, that they've prevented us from sliding into another depression time and time again. When I, in fact, think, which is kind of consistent with about everyone you're going to hear from this week, that what the Federal Reserve does, which is kind of squeezing interest rate lower by their open market activities and printing money through serial quantitative easing really is kind of a crime in a libertarian world. They're either kind of outright, fraudulently printing money, which is kind of the activity of a counterfeiter. They're kind of fraudulently manipulating prices downward in terms of interest rates by manipulating the money supply and not letting honest money circulate on the market. So what their activities have done in the market world and the investment world is actually create some unnatural market creatures, which unlike the short seller or the vulture investor or the corporate raider are kind of creatures that I think are kind of unnatural, if not harmful. And the two I would highlight on this page are zombies and unicorns. A zombie is a company that does not have sufficient revenues to pay its interest. And a unicorn is kind of the opposite side of the coin, not a company that's kind of the walking dead, but kind of a private company that's in a so-called growth and hopeful phase that has attached to it market value in excess of a billion dollars. So it's kind of the hope and dream company that's private. You can think of Dordash Uber at one point before it went public. And ironically, these two kinds of companies, one kind of a company that really has no revenues, no business should be out of business. And the other, which is kind of has kind of the hopes of kind of large growth, large addressable market, but actually doesn't have any current kind of profits or cash flow, kind of totally opposite companies. They both have kind of existed in droves during this last 10 or 11 years of inflation of the Federal Reserve. She will give you kind of a few statistics that kind of highlight just how prevalent they become. A recent Deutsche Bank analysis estimated that now there are one in five publicly traded companies in the world would fit the definition of a zombie, a full 20% of publicly traded companies do not have sufficient revenue to pay their interest expense, yet they still are kind of alive. That number is like double what it was seven years ago in 2013. On unicorns, the numbers there are quite staggering too. From the period 2003 through 2013, there were roughly four unicorns per year. That is four private companies before they went public that had valuations in excess of a billion dollars. That was kind of the valuation of their private financing round. So four per year from 03 to 2013. In 2018, there were 58 companies that attained that status just in the 2018 year. 2019, 66 attained that status. So zombie and unicorn investing has literally gone through the roof. And it's my contention that either of these companies in a truly free market would be far less in occurrence. Zombies would quickly go out of business, would go into bankruptcy instead of being bailed out and perpetually held up. And unicorns would certainly be a lot less prevalent if we did not live in a zero interest rate world that kind of allows price earning multiples, especially on companies with hope for growth to go to kind of infinite multiples. If we had kind of honest rates and higher discount rates, it would be very difficult for a company pre-public that did not have much in the way of revenues or cash flow to achieve a billion dollar market cap. So let me wrap up with conclusions on the final page and then I'll open it up to any Q&A that you might have. As I said at the beginning, it kind of all, for me, it begins and ends with Walter Block. I took his kind of insight that kind of the rogues in the economic world may not be doing anything that's unlawful. And in fact, maybe economic heroes, that was the whole point of his book. And I've tried to take that perspective with a number of so-called investment rogues, showing that even though in some cases their activities have been legally banned like short selling and in many other cases they're kind of castigated and downplayed and remarked upon hostily by the press and management that not only are they not unlawful activities, but in many cases they provide a valuable function to the market process. They speed up imparting information to security prices. They enhance liquidity in the security markets and they often and importantly provide liquidity at market bottoms and security bottoms. So whenever things are most stressed out in either individual securities or the stock market overall, these types of investors actually provide an important countervailing force that can help speed up the market adjustment process. And with that, I will kind of end my prepared remarks and open it up to any questions you all may have. Okay, any questions from Mr. Berger? If it's advantageous for corporate raiders to take over companies and how come companies use poison pill methods and different types of corporate strategies to stop takeovers from happening. And what wouldn't it just be better if they just let their company be taken over seeing that their market value isn't very good and somebody else could run it better? Well, I think that the main issue is kind of an agency theory issue which is this problem that corporate management, especially when they don't own much in stock may not have the financial incentives to kind of let a takeover artist come in because they're usually coming in because they're unsatisfied with current management. They either think their operational decisions are not good or that they're not allocating capital efficiently. So their job is at risk so that they have a vested interest especially if their stock ownership is slight which it is in many companies of keeping the corporate raiders at bay and putting up all kinds of kind of legal and media obstacles to letting someone come in who's obviously gonna put their job at risk. And they also encounter opposition typically from unions because a corporate raider may come in and try to sell off parts of the company that may be unionized or they may try to engage in other activities that can kind of put in a new labor force. They may move part of the operations overseas where there's kind of a new regime of who would be employed. So they're kind of a threat to entrenched interest of a lot of the factions that make up a company. They're typically, it's probably typically rare for a takeover to occur if there is a high degree of stock ownership at the management level and or if the equity incentive package of management is aligned clearly with the shareholder interest and many cases, neither of those conditions occur. Other questions. So Mr. Berger, I'm curious, can you hear me okay? Yeah, yeah. I'm curious if you have an opinion on Overstock, former Overstock CEO Patrick Burns campaign against naked short selling. Yeah, I mean, he had lots of battles with short sellers. I think the act of naked short selling, which I understand it is kind of selling something you don't own does not make any kind of legal sense to me. That to me seems kind of like a fraudulent type transaction to kind of short sell something when you haven't gone out and borrowed the security, which in my view is kind of what naked short selling is. But in other respects, I think his kind of his battle against short selling and that of many management in my view is kind of misplace and it usually ends up being a red flag. It's kind of like suppression of contrary opinion at colleges and universities or shouting down a speaker with unpopular views or not letting an Austrian seminar occur in Ivy League type university. It's usually kind of a red flag when you're not allowing kind of contrary opinion about your company to find its way out. Hello, I was wondering if you could speak more about the Unicorn companies that you spoke. I'm still a little unclear about what the idea is. The idea is there's just been this kind of mania in the venture capital world where companies with very little in the way of profits or cash flow, they might have revenues, have kind of had successive rounds of valuations that are valuing those companies as if they're worth a billion dollars or more. That's kind of the definition of Unicorn. It's a private company whose value is an excess of a billion dollars. And usually just to step back, if you thought something had a worth was valued at a billion dollars in the marketplace and you felt that your return on invested capital should be 10% a year, you would kind of think that that company should kind of have profits of 100 million per year just to kind of give a crude kind of arithmetic example. Most of the Unicorns don't have any profits at all, yet they're kind of achieving these excessive valuations. And my argument is that when you've driven discount rates to zero, that not only kind of raises the valuation of all investment assets, but it seems to have a disproportionate effect on companies that might have growth in the future or perceived as kind of much riskier investments. So it's kind of like the Federal Reserve and lowering rates to zero has kind of pushed investors out onto the risk spectrum. So the way to try to arguably get high return is to kind of invest in the most speculative type of assets. And that's usually what venture capital is. It's kind of what I would call almost lottery ticket investing where your kind of odds of success in venture capital might be that if you make a hundred investments, maybe five are gonna make you 10x your money, 90 are gonna like lose money and five are gonna break even, but you're hoping that the five that kind of make a lot of money are gonna make that whole investment turn out well. And all I'm saying is that kind of this pushing out people on the risk curve has kind of made valuations and venture capital, which is the highest risk form of investing go through the roof. And I think it's just a collateral effect of this prolonged reduction in interest rates and money printing that's been going on. Hi, just to generalize on that last point a little bit, how do you think Austrian economists should think about stock market efficiency as a whole? In the sort of mainstream debates on the one hand, you have the sort of Chicago school of people who believe in perfectly efficient financial markets that the stock price of any company at any moment perfectly incorporates all information that's currently known. On the other hand, you have people who say the stock market is just a giant casino and it's beset by bubbles and manias and it's all about narrative and persuasion. The reason Tesla has such a high market cap for example is because Elon Musk is a good salesman, not because the fundamentals of Tesla are sound. And therefore we should not rely on financial markets to allocate capital. Do you think Austrians occupy a kind of middle ground position or how would you think about a question like that? Yeah, I would say it's just a different ground because I would say that it's kind of all back to the Federal Reserve if you didn't have this kind of backdrop of this one behemoth that's kind of truly manipulating the discount rate and inflating markets. And you had kind of unhamped or unconstrained markets. Examples like Tesla would be far less prevalent. So if you had a true free market without the involvement of a Federal Reserve that's trying to be a price setter and kind of controlling the most important variable in security prices, which is the interest rate and the discount rate, if you didn't have that kind of unnatural anti-market entity in an Austrian world, I would say that security prices would kind of tend towards being efficient or it would be kind of a market process where kind of irregularities were kind of corrected more quickly than they would otherwise be. But prices can never be perfectly efficient because the Austrian concept I think is that all human action takes place under conditions kind of through time under conditions of uncertainty. And so there's a tendency towards correcting those imperfections and the market process works wonders but there's no way that it can be perfectly efficient. That's kind of like a kind of just as unnatural and ideal, I think, is the Federal Reserve involvement in security prices. So I don't know if it's a middle ground but it's certainly a different ground. Mr. Berger, thank you very much for very enlightening talk. Okay.