Edwin Dorsey (03:12):

And she says, “There’s something off about this company. You should look into them. Something doesn’t seem right.” And billion dollar publicly traded company, I’m like, “Okay, I’ll look into safety issues at this babysitting platform. Maybe there’s something there.” Right away I start seeing a lot of lawsuits that have been filed against the company for not properly vetting babysitters. There were some local news reporting on Care.com about safety issues the company was having, and I decided to test out their platform screening for myself by trying to sign up as a babysitter on Care.com as Harvey Weinstein.

Edwin Dorsey (03:44):

So, I made up a fake name, named Harvey Weinstein. I used a photo of Harvey Weinstein. I made up an email address, a social security number. I consented to their background check. And I’m like, “There’s no way they have approved this account as Harvey Weinstein.” They said, “We’ll get back to you in 48 hours.” No way I’m approved if they’re doing the vetting they claim to be doing.

Edwin Dorsey (04:03):

48 hours, I get an email. “Hello, Harvey. You’ve been accepted to Care.com. We passed the background check.” And then I’m taking screenshots, I’m documenting all this. I put it in a little report and tweeted out online. “Look, the company isn’t doing the vetting they claim to be doing,” and that goes a little viral.

Edwin Dorsey (04:21):

The stock falls, a board member resigns. The company calls Stanford to complain about me, which was my college. They have some ties with donors at the university. And Stanford says, “You need to take this down now. You violated our wifi policy in doing this. This is bad.” And I’m like, “No way I’m taking this down. That’s ridiculous.” And I keep writing about the company. I filed public record requests for consumer complaints against Care.com to see that they were overbilling customers, making it difficult to cancel, inflating other investor metrics.

Edwin Dorsey (04:52):

And to make a long story short, I sent up all my like write ups on Care.com 100 different journalists. Eventually, The Wall Street Journal gets a little interested and they published a front page investigation about eight kids who had been killed by Care.com babysitters. The CEO, CFO, and general counsel of Care.com all resigned. The stock sells off and eventually it’s acquired by IAC who puts in better safety practices.

Edwin Dorsey (05:17):

But that whole experience, one, gave me a firsthand look at how bad corporations can behave. And two, it gave me a little credibility because I got mentioned in The Wall Street Journal story. It gave me a Twitter following and a platform to keep going after bad companies and eventually launch the newsletter I write today.

Clay Finck (05:35):

What a story. It just blows my mind that something like this could fly under the radar for a billion dollar company, and of all people to discover it, it was a freshman in college to discover what was going on behind the company and really dig in. And then, it ends up on the front page of The Wall Street Journal. Just, what a story. Just so funny to me.

Edwin Dorsey (05:55):

Clay, as a quick side note. I have this theory that because Wall Street is really middle-aged man dominated, Wall Street’s good at pricing companies that have to do with middle-aged men, but then terrible when the company is relevant for women and children. If Wall Street was more woman dominated, something like Care.com would never fly. I definitely think that’s a thing where, because it’s so middle-aged man dominated, issues affecting women and children just totally do not get a fair look by Wall Street, which is good for people like me who want to dig into it.

Clay Finck (06:26):

You mentioned that this occurrence gave you the short selling bug. Before we dive into some of the other companies you’ve done research on, let’s cover short selling as it’s something that you’re very familiar with. Could you talk to our audience about what short selling is?

Edwin Dorsey (06:42):

Absolutely. So, short selling is the opposite of going long to stock. Mechanically it’s a little complicated, but the way it works, Clay, is let’s say I want bet against Apple stock and you own apple stock. I’ll approach you and say, “Hey, can I borrow your shares? I’ll give them back to you at a future date, and I’m paying you a small fee for the inconvenience of borrowing your shares.” I borrow them from you, I sell them on the open market for $100 dollars today. And then two months later after the stock has presumably fell, I buy them back for $80. I return the shares to you and I profit the difference. I sold it for $100, I bought it back for $80 I made $20 less a inconvenience fee I pay you.

Edwin Dorsey (07:23):

In reality, the stock can also go up. So, I can sell it for $100 and be forced to buy it back for $200 to return it to you, and then suffer massive losses. But short selling is just one of many ways you can bet against a company. It’s really common with big institutional hedge funds to offset risk in a portfolio.

Clay Finck (07:42):

What’s always mentioned with short selling is that your downside’s unlimited. So if you buy Apple stock and it goes to zero, you just lose the money you put in. Whereas if you go short, your downside is unlimited because the stock can go up as much as the market wants to bid it up, really.

Edwin Dorsey (07:58):

Yeah. The common short seller refrain though is, a lot of companies go to zero and I’ve never seen a company go to infinity. But that’s true, your risk is unlimited because stocks can go up a lot.

Clay Finck (08:10):

Now, why do you put such a big emphasis on short selling specifically?

Edwin Dorsey (08:15):

So, I would say a few things. First, just by coincidence, my early mentors were big short sellers. So if my early mentors were in private equity, maybe I would’ve drifted in that direction, but that’s what attracted me to short selling.

Edwin Dorsey (08:29):

Another thing I’d mentioned that’s unique to short selling is you can actually make a difference in the world with activist short selling. Where a lot of finance is paper trading, moving shares back and forth; with short selling if you problems at a company, start exposing them, are short the stock, you can, one, profit as it falls, but two, you can actually make a difference like in the Care.com example.

Edwin Dorsey (08:51):

Short sellers, in many ways, act like journalists in trying to uncover issues, uncovering corporate misconduct, and either talking about it publicly by writing about it or working behind the scenes and telling other investors about a problem, going to regulators, going directly to a company. So, what attracts me to short selling is you get this real world impact that you don’t necessarily get with other parts of finance.

Clay Finck (09:13):

I think it’s important, you mentioned that there is an important role that short seller’s play. I think most people are familiar with what happened at GameStop. You hear these hedge funds were able to short over 100% of the shares, which shouldn’t even seem like it’s legal, but people were able to recognize that opportunity and just have that short squeeze occur where all these people went long in the company and really hurt these short sellers that ended up getting margin called.

Clay Finck (09:41):

So, how does the margin call process work with short selling? Is that something that retail investors have to be worried about if they go short of stock?

Edwin Dorsey (09:49):

Well, you definitely need to be aware of that if you’re short of stock, because shorting is very risky. There’s large from margin requirements. Meaning, if you have $100 portfolio, you probably can’t just be short $100 of a random stock because if that stock doubles in a day, which is very possible, you’re going to be worth zero.

Edwin Dorsey (10:07):

So in a situation GameStop, you had a lot of these hedge funds and individuals short this company they thought was a dying retailer. If everybody shorted, the short interest gets extreme, where every share out there is being shorted more than one time. It’s mind blowing.

Edwin Dorsey (10:22):

And then if the stock starts to rise, brokers are going to require higher amounts of margin where instead of being able to do short for every dollar of equity you have, you might be need to have $2 of equity to be short $1, or $3 of equity to be short $1. Because when in times of big volatility, brokers want a big backstop to make sure if a stock goes up 400% in a day that you’d be able to cover and return the shares. So, that’s what happens when you get these short squeezes.

Edwin Dorsey (10:51):

Melvin gets in a lot of trouble because they have these huge short positions. Their brokers are demanding more and more cash say, “Hey, they’re good for their shorts. They’ll be able to cover in the future,” and that forces them to cover early. And if you cover a lot of stock in a short period of time, that pumps up stocks more.

Edwin Dorsey (11:08):

So, sometimes if a stock with a heavy short interest starts rising, more and more people need it covered to reduce their exposure, and that forces the stock up a lot higher, which is how you see these short squeezes. So, there can be a dynamite might affect here with some of these heavily shorted names once they start going up.

Clay Finck (11:25):

Back to the fraudulent activity that you look to discover. I’m wondering with all the regulations that exist and information that’s public, all the regulatory pieces with a company going public, how are some of these things even possible that you’re able to discover in companies?

Edwin Dorsey (11:43):

Yeah. People think there’s stringent regulations, but in reality, a lot is up to the discretion of management. I think SPACs are unique in that you cannot be held accountable for your SPAC projections, regardless of how off they are. So, people will project $100 million in revenue and only get $1 million in revenue, and that’s okay in the SPAC world.

Edwin Dorsey (12:03):

There’s tons of corporate misconduct that people don’t pick up on. So just because there’s an auditor, doesn’t mean there isn’t fraud. In fact, every big fraud had an auditor. Enron had a big auditor. There’s tons of stuff that doesn’t get picked up on.

Edwin Dorsey (12:17):

I think one of the big issues is that Wall Street focuses a lot on numbers and modeling, and less on the heart and soul of a customer experience. So by focusing on customer experience, the core of a product, understanding what a company actually does, you can pick up on a lot of these things that Wall Street misses because they’re not reflected in the numbers or they haven’t been reflected yet in the numbers.

Edwin Dorsey (12:38):

So, that’s one way I think I’m able to pick up on a lot of stuff that people don’t is, traditional investing is a lot about looking at numbers and building models. I’m a lot more about the customer experience and what experience does the company actually provide.

Clay Finck (12:52):

Outside of the customer experience, are there any other red flags you look for in a company? Not just in companies to short, but maybe companies to avoid investing in?

Edwin Dorsey (13:03):

Absolutely. One of the biggest red flags, Clay, is high executive turnover. You don’t want to see executive shuffling in and out of a company. So, I use a website called InsiderScore to look at it, but it’s publicly out there. A high degree of executive turnover, especially at a smaller company, is a big red flag.

Edwin Dorsey (13:20):

There’s one company called Cantaloupe. They make credit card readers for vending machines. They’ve had seven different CFOs in the last five years. Something’s off there, and it’s probably accounting related if you keep going through CFO after CFO, after CFO.

Edwin Dorsey (13:36):

So, high degrees of executive turnover, that’s one major red flag. High amounts of insider selling is a smaller red flag. Auditor turnover: if auditors are resigning, suddenly that’s not a good sign. If you’re a bigger company and you don’t use a big four auditor, that can be bad, especially I have a big skepticism of a lot of US listed Chinese companies, any overseas company, I’m generally more skeptical of. The biggest flag any individual investors should look for though is a high degree of executive turnover. That’s never good to see.

Clay Finck (14:08):

I think for anyone that discovers your research, they might want to look into short selling themselves after they see you’re research and they’re like, “Yeah, there’s some fishy things going on about this company.” So I’m curious, is it easy to short a company? A regular retail investor, would they just be better off just buying put options or doing something like that?

Edwin Dorsey (14:30):

So, Clay, I generally don’t encourage people to short on their own because your downside’s unlimited. You can short $100 and can lose $2,000. What individual wants that potential risk? Even if you feel like you know what you’re doing, mechanically there’s a lot of things with borrow rates and you’re being charged to fee to short of stock. So generally, for individuals, especially individuals who are new to the market, I don’t recommend short selling.

Edwin Dorsey (14:56):

Another important thing to remember is on average, over the last 200 years, the market’s gone up on an average 9% a year. So, you’re fighting against the tide of rising markets when you’re shorting, and that’s never fun to do.

Edwin Dorsey (15:08):

So for most individuals, the other alternative is a put option where you invest a fixed amount of money in a right to sell a stock at a certain price on a certain day. So your losses are limited to the amount you spend on the put option, and generally, you can make multiples of what you buy in a put option.

Edwin Dorsey (15:25):

The problem with the put option versus shorting is there’s a specific date a stock needs to fall by in order for you to make your money. But for most individuals, buying puts is much less risky than just going short a lot.

Clay Finck (15:38):

Could you talk about some of the resources you use when you’re doing research on a company?

Edwin Dorsey (15:44):

Absolutely. And I think there’s a lot out there in the public domain that just investors don’t utilize enough. My first resource I use a lot is Twitter. I’m on Twitter two or three hours a day. You can search tickers and Twitter and come up with all these articles. I’ll honestly spend an hour on every company just looking on Twitter. Every consumer complaint people have tweeted at the company, every article that’s been shared on Twitter. You find a lot of cool stuff by using Twitter to research companies.

Edwin Dorsey (16:10):

EDGAR is the SEC’s website to get at filings on publicly traded companies. That’s what everybody uses. I use that as well. PACER is the government website that allows individual investors or anybody to look at lawsuits against any specific entities, I use that.

Edwin Dorsey (16:25):

In addition to SEC’s EDGAR, I use SEC Full Text Search, which allows you to search by term. You can see any time I see specific term has appeared in a company’s SEC filings over the last 20 years. So, you might look up the term “resignation” and see all the times “resignation” appeared in the last 20 years.

Edwin Dorsey (16:43):

I use Glassdoor to look at employee reviews. Sometimes you’ll find something interesting there. I also use the PCOAB AuditorSearch tool, which allows you to type in a company. It’ll pull up the company’s auditor, which is generally publicly well-known. It’ll also show you the specific audit partner responsible for auditing that company. And that can be insightful because that person might have a track record of the auditing companies that go to zero. So, those are all completely free resources I use.

Edwin Dorsey (17:13):

In terms of paid sources, two I like. One is TES. It’s an expensive database that lets you see expert network calls. Another is Bedrock AI. It’s a little cheaper. You can put in any company, and it uses AI to show you all the problematic things with its filings.

Edwin Dorsey (17:28):

But most of my research is done with completely free tools. And I think the investors use Twitter, the SEC Full Tech Search tool, PACER, Glassdoor; you’re going to uncover a lot that you traditionally miss.

Clay Finck (17:41):

Very interesting. It’s very clear that you do your research as I’ve read a few of your reports, including your most recent one, which is Roblox and that one’s really making waves. There’s a lot of people talking about it, giving some counterpoints. I just found the dialogue on Twitter over this one specifically so fascinating. Tell us about some of the things you found with Roblox.

Edwin Dorsey (18:02):

So, Roblox IPO direct listed a year ago, $40 billion company. It has 30 million daily active users in the US and Canada. It’s a gaming platform targeting a lot of young kids, six to 14 year olds primarily. And like Care.com, what do you have when you have a lot of young kids playing the game? You have a lot of predators. You have a lot of pedophiles on the platform trying to take advantage of young kids.

Edwin Dorsey (18:28):

And it’s a unfortunate because they say, like Care.com, Roblox says they have stringent safety measures. They say they vet every item that goes into the game. There’s a lot of user-generated content on Roblox. They say they have a team of 2300 people in safety and moderation.

Edwin Dorsey (18:44):

What I showed in my Roblox report is that they actually don’t take safety that seriously. Over and over again, registered sex offenders, convicted pedophiles have gone on the platform and abused kids or gotten kids phone numbers, gotten to meat them in person. Just terrible, terrible things, and the company just isn’t able to stop it because they haven’t made the correct investments in trust and safety.

Edwin Dorsey (19:05):

For example, the company claims they banned handholding in any romantic gesture the game, but then they have live strip clubs where children can role-play as strippers with real audio, with other strangers to earn virtual currency. This is so messed up. Of course this was a breeding ground for a lot of inappropriate behavior. So, that’s problem one with Roblox.

Edwin Dorsey (19:27):

Problem two with Roblox is that they have this hidden dark web economy for their virtual currency. The way they make money is they get parents to buy their kids this virtual currency called Robux, which is worth about a penny, that they can use in games for presumably a better experience. In reality, a lot of kids are buying and selling items, Roblox items in this marketplace where items can be worth $1000, and they go up and down in value. There’s a stock market for these in-game items.

Edwin Dorsey (19:57):

There’s also a lot of illegal gambling with Roblox’s currency where there’s off-platform sites where people can wager thousands of dollars of Roblox’s fake currency on games of roulette and paper scissors and coin flips. It all makes no sense.

Edwin Dorsey (20:14):

And the thing you need to be very worried about with Roblox is in addition to letting people buy this virtual currency for a penny, there’s also a cash out mechanism where on the black market or through the company yourself, you can get around half a penny back by turning in this currency.

Edwin Dorsey (20:29):

So when you have that, you have concerns about money laundering and all this weird things going on, where Roblox is seen as a super safe kid-friendly platform for an awesome gaming experience. It turns out they have huge moderation and safety issues. They have a dark web illegal market for their virtual currency, and investors aren’t aware of it.

Edwin Dorsey (20:48):

One prominent venture capitalist on Twitter is like, “Yo, no. Roblox is 1000 times safer than a playground,” is what he said. “It’s 1000 times safer than a playground.” Even though they have virtual strip clubs for six year olds in their game. It’s completely off-base, and just investors aren’t aware of it. I think it’s going to be a really big problem in the future.

Clay Finck (21:10):

I have some questions on Roblox. Regarding the virtual currency, is that a crypto, or what’s going on with that?

Edwin Dorsey (21:16):

I don’t think it’s crypto. I think it’s just, parents pay $5, $10 and their kids get 1000 of these Robux that they can use. I think it’s just like other game’s virtual currency, but there’s a cash out mechanism where you can convert it back to real US dollar.

Clay Finck (21:34):

So I was curious, if there’s these Robux on these other websites, how are you able to get the virtual currency off of the Roblox platform? That piece just doesn’t make too much sense to me.

Edwin Dorsey (21:46):

Okay. So, you’re able to link up your Robux account with these offsite platforms, and then the platforms, essentially, in order for you to join, they take control of your Roblox account and they can send it to other users. And sometimes it’s easier to trade items between Roblox users and not just the currency. So there’s these proxy items to represent the currency.

Edwin Dorsey (22:09):

There’s one called Perfectly Legitimate Business Hat that’s worth around $100 US, and you’ll see players trading them back and forth between each other when they’re really just settling gambling debts done offsite. It’s crazy, and this is happening on a platform for six year olds. The company’s making money off it and they don’t want turn a blind eye because they make of it.

Edwin Dorsey (22:30):

Another example of how terrible this is. There’s apps that where kids can download it, and they watch ads and do nonsense, fill out quizzes, leave fake reviews, and they get paid this virtual Robux currency, which they use in their games. There’s literally eight year olds leaving online reviews like, “I’m spending an hour every day watching ads just to earn Robux for this game.” So, there’s this entire back market ecosystem Roblox is allowed to be created that they make money off of that investors just don’t know about.

Clay Finck (23:03):

It’s pretty incredible how many users Roblox has. You mentioned they have 30 million active users. When your dealing with that many users, a skeptic of this article would say that the internet has bad actors, and any company of Roblox’s size is going to have these types of issues.

Edwin Dorsey (23:22):

Absolutely. And it always comes down to reasonableness and company representation. So, is this just that there’s tons and millions, millions of people and there’s a few bad actors and I’m cherry-picking, or is there actually an issue?

Edwin Dorsey (23:35):

Well, if you look at some of the people who’ve been indicted or arrested for inappropriate actions through Roblox, one person was arrested for abusing, getting the child pornography from 150 children, and that’s only enabled by the internet and by a negligent platform. The guy’s own lawyers that the case was possibly unprecedented where a sex offenders is using Roblox to prey on children.

Edwin Dorsey (23:57):

In other examples, registered sex offenders sign up on Roblox and buy the currency from Roblox. Roblox is making money selling in their virtual currency to people already who are convicted sex offenders. That is a whole nother level of negligence that you probably don’t see on other platforms. No one’s created this real virtual currency that has a black market value. No one has a game that’s solely targeting young people. That’s one thing.

Edwin Dorsey (24:21):

And then the other thing is the company’s representations. The company says they monitor every piece, that a human reviews every piece of content that is on the website. And they tell parents, “We have cutting edge safety technology.” They say, “All romantic gestures are banned.” Then there’s literal strip clubs in their games. That’s showing that they aren’t actually vetting. They aren’t doing the vetting that they represent to parents they do.

Edwin Dorsey (24:43):

So it’s one thing if you say, “We have a platform that’s a free for all, and hopefully kids will be safe.” At least you’re accurately re representing it. But you can’t say you’re vetting every item and then not actually vet every item.

Clay Finck (24:57):

Do you know how much they’re spending on safety for their platform?

Edwin Dorsey (25:01):

I don’t know. I’m sure they’ll exaggerate and lie and say, “We have 2300 people.” One interesting thing though is they also operate in China. And in China, there’s a lot of stringency. The government says you can’t show blood on screen. The children cannot play for more than an hour a day. You can’t show any nudity, any inappropriate actions to Chinese kids playing Roblox, and Roblox has a whole different mechanism for content moderation in China where they invest a lot there that doesn’t exist in the US. So, I don’t know how much they spend, but whatever it is, it’s not enough, and they’re not confident enough.

Clay Finck (25:37):

Do you know if they’ve ran into any legal issues around the items you’ve highlighted?

Edwin Dorsey (25:42):

My guess is no. I don’t think people are as aware of how widespread the problem is. I think some parents just stop their kids from playing, and I bet in some communities, parents have caught on that there’s a lot of inappropriate activity on Roblox. I don’t know if it’s really been solved through litigation yet.

Clay Finck (26:01):

Yeah, it really does come down to that trust, especially from the parents, the law enforcement, and the government. If they lose overall trust in the platform, the company could really run into some issues. So, it’ll be interesting to watch play out.

Edwin Dorsey (26:14):

And another important thing with Roblox, and one thing I always look at is, what is the market valuing at the company at? If it’s trading at 10X profits and the market knows there’s some issues, then that’s fine, but Roblox is trading at 40X revenue. It’s not currently profitable on a gap basis.

Edwin Dorsey (26:31):

It’s also a game that’s selling really to children. If you know anything about children online, things go in waves. There’s fads. Club Penguin was hugely popular 10 years ago, and it’s not even around now. To me, Roblox is the modern day Club Penguin with a lot of issues, and two years from now, it’ll be just not as hot. But Wall Street, the men of Wall Street are like, “I have a nephew who likes Roblox. To the moon, Metaverse Play, whatever.” But I think Wall Street just has this one so wrong.

Clay Finck (27:01):

Well, I’m really excited to keep an eye on this one. Let’s talk about one of your other reports, AgEagle Aerial Systems, ticker UAVS. I’ve really enjoyed reading this report, and it’s almost comical. This is essentially a stock that was pumped up because of rumors of a potential Amazon partnership that was just total hype.

Clay Finck (27:22):

What I find so fascinating is you wrote this report back in February of 2021 and the stock is now down 90%. I mean, what a find on your part, and I’m sure many of your subscribers took the opportunity to bet against this one after reading some of the information you found.

Edwin Dorsey (27:41):

AgEagle Aerial Systems was a great example of some of the risks inherent in investing, especially when you’re an individual investor. This company, AgEagle Aerial Systems, claimed they were making a next generation drone that was going to revolutionize transport and delivery. And then they said, “Our drone can be used to monitor marijuana fields for hemp farmers to buy a camera.” They’re just a mess.

Edwin Dorsey (28:08):

And then eventually they say, “Oh, we’re going to do partnerships with major e-commerce developers to deliver packages directly to people’s houses with our drones.” And there’s just so much hype, so much passion. The individual investors take the stock from 1 to 15 on this just management hype, and then you just dig into it. The moment you start digging into the company, everything falls apart. They have like six employees, they’ve spent $400,000 in total on research and development. You can’t make a next generation technology with that.

Edwin Dorsey (28:37):

If you go to YouTube and try to find videos of it, you can find their drone is literally just a remote control helicopter with the GoPro attached. This is just a nonsense company. And you dig more and more into it, and you’re like, “Where do these rumors that Amazon was going to partner with them come from?”

Edwin Dorsey (28:54):

Well, what happened is the chairman’s daughter made a video that was private on YouTube that had the Amazon logo and AgEagle Technology’s logo next to each other. And then some anonymous person on Reddit is like, “Look what I found, there’s a partnership coming.” And then all these paid stock promoters are like, “I hear a rumor on AgEagle,” and it’s just all fake. It’s all nonsense. And the investment group behind it that gave this company a lot of money to spend on this paid stock promotion is a fund in some obscure European country that had been all been involved in 10 of these pump and dumps before where every company goes up a ton and then collapses.

Edwin Dorsey (29:31):

And this company got to $1 billion market cap, mostly money from individual investors who lost their shorts, even though there was literally no substance there; no revenue, obviously no partnership with Amazon ever materialized. It was all puffery and nonsense.

Edwin Dorsey (29:48):

And it’s one of those things where if you’re an individual, you might say, “Oh, let me get in early. They’re going to have a partnership with Amazon. I think I’m doing real research. I think there’s a lot of new drones, and they say…” Management is spewing all this nonsense, but there’s no substance there. And that’s why you always got to go to the source filings, go to the SEC filing, see how much they spend on R&D. How many employees do they have? Does it make sense that a six person company with 400,000 in R&D actually changed something significant? No. So, AgEagle Aerial Systems, just one of the most ridiculous companies out there.

Clay Finck (30:22):

I think there’s a lot one can learn with what you found from this. I mean, this company just screams red flags. It had six employees spent $40,000 on R&D in the past three years, suspicious revenue recognition policy, one undisclosed entity that accounted for 94% of their revenue. The list just goes on and on with this one. It’s just so ridiculous that this was able to happen in a public market for investors.

Edwin Dorsey (30:50):

And the thing is, Clay, this type of stuff just keeps happening over and over again where companies at a billion, $2-$3 billion valuation are going public even though they have no substance.

Edwin Dorsey (31:02):

Another more recent example I wrote about, Clay, Embark Trucking. This was a $4 billion SPAC deal that happened two months ago. I think late November, this trucking company, they’re building software to help trucks drive autonomously and their software should be released in 2025.

Edwin Dorsey (31:19):

They have no revenue, they have a 25 year old CEO. And the more even you look into it, they’re going through a SPAC with a $4 billion evaluation, but there’s just nothing there. All the executives at this company are the CEO’s college roommates, and they’re all in their 20’s from the University of Ottawa. It’s like, “Wait a second.”

Edwin Dorsey (31:36):

And then you look at the one real engineer they hired from Tesla. He left after less than two years, which is a sign something else is a little off. And you look at competitors. Every competitor in this space of autonomous trucking has hundreds or thousands of patents; this company had zero patents. They said they rely on trade secrets, like Theranos. “We rely heavily on trade secrets.” And then they’re like, “Well, we can be sued for violating other people’s patents, too.”

Edwin Dorsey (32:02):

And it’s so front frustrating to see it, because it’s almost always retail investors who are getting screwed over because the CEO of that company would go, Embark Trucking, and go on these podcasts, go on media appearances and would tout nonsense metrics. He’d say, “We have 15,000 pre-orders for our truck.” And then I’d go to the SEC filings, you’d dig around for two minutes. Well, what is a pre-order for your truck? Well, first you don’t make the trucks. You’re just making the software. Second, these are the pre-orders of $500 refundable deposit, and your partners were exempt from the $500. So, your 14,000 pre-orders could be 13,000 from your own made up entity that you’re exempting, and then 1000 from a real customer who’s just putting a $500 refundable deposit down.

Edwin Dorsey (32:48):

So, you’re an investor sitting at home trying to do research saying, “14,000 trucks. It’s a huge potential,” and then the reality is it’s just all nonsense. It’s just all puffery and no substance there. And it’s really frustrating to see, which is why I have a passion for this, because it’s hurting individuals.

Clay Finck (33:08):

With all these SPAC companies going public, it seems like a really good hunting ground, especially since it’s been in a bubble, what feels like a bubble the last year or so, and a lot of these companies moving down after they end up going public. So, I think that’s a good place to look for someone like yourself.

Edwin Dorsey (33:24):

Absolutely. And Clay, I tracked these specific sponsors and underwriters. There’s one called EarlyBirdCapital. I think they’ve taken 22 company’s SPACs public in the last two years. 22. Of those 22, 21 are down. Only one is up and 21 are down. And I’m like, “You could have a pretty good bating average if we just focus on SPACs.” So, SPACs are one really fertile hunting ground for me.

Edwin Dorsey (33:49):

The other place I look a lot are US listed Chinese companies. A lot of Chinese companies come to the US, access our capital markets here, and then commit fraud or are just live about their business. And you can see a lot of these IPOs just fall 90% in the first two years after they list. That’s another really fertile hunting ground. But SPACs, tons of nonsense going on there.

Clay Finck (34:14):

Have you done a lot of research on Chinese companies? I always hear that it’s very difficult to find real research, to find what’s actually going on behind the scenes in these companies.

Edwin Dorsey (34:25):

So, it’s tough to get really in the weeds if you don’t understand the language and can’t go physically to China and visit the factories and do that type of research. I like to do what I call just red flag hunting. Look at a company, and see just how many red flags will pop out of once.

Edwin Dorsey (34:42):

So, I look at the CEO and board and see, what other boards and companies have they been involved in? Sometimes you look at a $2 billion Chinese company, and every board member has been on three other companies that collapse and the CEO has been on a company that collapsed. And it’s like, “If you’re all associated with failure in the past, then your current ventures need to be a failure.”

Edwin Dorsey (35:02):

We touched on this briefly before, but I also look at the auditor. I think for US listed Chinese companies, this can be particularly important because the risk of fraud is a lot greater. I look at the auditor and the specific audit partner who’s in charge of auditing that Chinese company. And oftentimes, you’ll find individuals who only audit fraud. Literally, every company they audit goes to zero. And I’m like, “Oh, wait. You have this really checkered individual in terms of auditing you? That’s an instant short.”

Edwin Dorsey (35:32):

One thing that I didn’t mention that I do a lot is, Chinese companies specifically, is I look at SEC comment letters. This is a completely free thing on the SEC’s website. You can search for comment letters, which is informal correspondence between the SEC and a company. Usually before they go public, but sometimes afterwards. You’ll find a lot of nuggets of really interesting information in those letters.

Edwin Dorsey (35:56):

Sometimes the SEC is like, “Wait a second, your CFO forgot to sign that form. Why is that?” They’ll be like, “Oh, clerical error.” It’s never a clerical error. It’s always fraud. Or they’re like, “We can’t understand why these two metrics don’t agree.” And companies will be like, “Clerical error. Clerical…” It’s just a total fraud if you’re making things up. So to one thing I look for, SEC comment letters. Yeah.

Clay Finck (36:21):

Very interesting. Switching gears, let’s talk about a stock that you are actually long, and you’ve been very public about this position, and that is a position in Twitter. The stock hasn’t done well as of late, like many other growth companies. Tell us you’ve been seeing in Twitter and why you like the pick so much.

Edwin Dorsey (36:42):

Clay, I need to disclose. I got the vast majority of my net worth in Twitter stocks, so I’m biased, and none of this is investment advice. Everyone should do their own thinking and own research on this.

Edwin Dorsey (36:54):

As a user, I love Twitter. It’s an awesome platform to learn. It’s the perfect discovery tool. As a newsletter author, Twitter is essential for my business and so many other content creators. I get over half my new subscribers from Twitter. Every newsletter gets 50% to 80% of the new subscribers from Twitter. It’s incredible how important it is for any content creator and discovery of information.

Edwin Dorsey (37:17):

It’s unique among the media platforms in that it isn’t, to me when you talk about Facebook and Instagram and TikTok, those seem fads to me. It’s interesting, it’s cool, it’s something to spend your time or impress other people, but it could totally go away. Where Twitter, it’s a professional identity and learning tool that’ll be with you for life. You can use Twitter when you’re 16, you can use it all the way up till you’re 90. Instagram, at least in my view, doesn’t have that staying power and durability that Twitter has.

Edwin Dorsey (37:48):

I also love the Twitter management. They would always talk about wanting Twitter to be around for the next 100 years. Caring about the user experience, caring about moderation, putting a lot of thought and caring into these issues to where Facebook is the exact opposite. Facebook cares about money. Facebook wants to be monetizing like crazy. Twitter banned political ad spending very early on the platform because it was bad for the health of conversation, while Facebook was taking money from politicians of all stripes for a very long time.

Edwin Dorsey (38:17):

Twitter hasn’t had these safety issues. They’ve invested on and putting public’s studies out on how to improve the health of the conversation, Facebook just never did that. So, I like Twitter because it’s this platform that I’m confident will be around for the next 100 years.

Edwin Dorsey (38:32):

It hasn’t been great at monetizing, but it’s going to get better and better in the long run. Historically, it’s just been advertising. Now, they have a lot of new features that have opened up new paths for monetization. Not just better advertising, but super follows and paying for content you like from top creators. Spaces, which is their live audio product, where you can include ads. Newsletters, e-commerce is another place they’re venturing into where I think they’re going to be successful in allowing people to buy directly on Twitter. There’s all these avenues for tons of potential that just haven’t been fully realized.

Edwin Dorsey (39:06):

And the final thing is, two months ago, they got a new CEO who’s the youngest CEO in the S&P 500. So Twitter, this remarkably unique asset with 200 million daily active users, just loved by its users, tons of potential. And now, you got the youngest CEO in the S&P 500 with incredibly low expectations and a ton of room to execute. This is a company I seen myself holding for the next 10, 20, 30 years, and I think the market just has it so wrong. It’s the ninth most visited website in the world, and it’s got a $30 billion market cap. It just makes no sense.

Clay Finck (39:42):

One of the concerns for me on Twitter is how effective they’ll end up being at monetizing their platform. This is my guess as to why it’s trading at a much lower valuation than the other social media platforms, because as a business, in the end it comes down to the bottom line that the company produces when it comes to valuing the company.

Clay Finck (40:02):

Also, when I think of Facebook, they collect all of this data on their users; their gender, age, occupation, income, so on and so forth. I’d be surprised if Twitter collects anywhere near the data that Facebook does. Facebook’s ability to monetize their users has just put them head and shoulders above any other social media platform, but now they are running into those privacy issues. So yeah, that’s my main concern about Twitter, especially since advertising is their primary revenue source, as of today at least.

Edwin Dorsey (40:34):

Clay, that’s a great point. And ironically, I’m going to twist that around and say it’s a positive. Because with Facebook, you saw that they’ve been hit really hard recently because of Apple’s privacy changes concerning due restrict what information you get and how much you can target your ads. That’s affecting Facebook a lot.

Edwin Dorsey (40:51):

Because Twitter was a little bit behind the eight ball on collecting information and never relied on it that much, they’re going to be much less affected by this push towards privacy and respecting people’s private information. I would say Twitter’s just so far behind other companies and how well they can target advertisements and what you can do with the advertisements. Until recently, you haven’t even been able to directly download an app straight from a Twitter ad. Because of that, I think it’s almost a good thing.

Edwin Dorsey (41:19):

And finally, the market’s really pricing this in. Twitter’s at 8X revenue or something silly, where other platforms like Snapchat and Pinterest are at 30X, 40X, even though Twitter has the most room to grow. It just never makes sense to me.

Edwin Dorsey (41:33):

I write a newsletter, I get a lot of followers from Twitter. I would happily pay $30,000 a year just to promote my newsletter to other people who sign up and pay for newsletters through Twitter. Right now, there’s no great avenue for me to do that, but I know the moment I can, I’m totally going to be willing to do that. So I see myself as an incredibly happy user.

Edwin Dorsey (41:53):

I pay for their Blue product, which is their $3 month subscription that just rolled out. They have tons of room to monetize with me and other users, and they have the durability of a tech company that I don’t think exists with a Facebook or Pinterest or Snapchat.

Clay Finck (42:09):

The censorship or calls for people to leave Twitter, is that a concern for you at all?

Edwin Dorsey (42:16):

If you look at all these other Twitter copycats that say, “We don’t have censorship,” they get a lot of viewers and then everyone leaves because it turns out you don’t want just tons of craziness just spewing over and over and over. When you have nothing, then it just all skews to the crazy zone. And when you have some censorship and it all skews right to the line of what’s censored in terms of virality.

Edwin Dorsey (42:40):

I’m a big free speech fan. I think in order to have free speech, you need to have too much, you need to have terrible content. You need to have content you don’t agree with it. It’s just necessary to preserve the beauty of free speeches, is you need to get the ugly side. They go together.

Edwin Dorsey (42:55):

That said, Twitter’s a private company. So I think if you have clear policies, and one of the things they did that Facebook’s never done is they rewrote their policies to be in plain clear English so all users can like understand what the rules are and abide by them. If you have policies and you enforce them, I don’t view it as that much of a business risk.

Clay Finck (43:12):

Yeah. I find it really interesting that Twitter’s rolled out all of these new products. You mentioned the newsletter feature, the Spaces, the Twitter Blue, the super follows; all these things that have potential for them.

Clay Finck (43:26):

Let’s dig a little bit more into your newsletter called The Bear Cave. What do you offer with The Bear Cave, and where do you see it going in the future?

Edwin Dorsey (43:36):

So Clay, The Bear Cave is a newsletter I started two years ago. Instead of joining a hedge fund when I graduated college, I decided to start out on my own with this newsletter.

Edwin Dorsey (43:47):

The Bear Cave does two things. There’s a free version where every Sunday, I just recap what’s going on in the short seller world; I summarize new activist short campaigns. There’s five or 10 every week. I list all interesting resignations from the last week so you can keep track of executive turnover. I link to interesting articles, and I highlight five or 10 interesting tweets. That’s in the free version that goes out to 25,000 people every Sunday.

Edwin Dorsey (44:13):

And then there’s a paid version which costs $44 a month or $440 a year where I do deep dives on companies that I feel are misleading investors or hurting customers. So, that’s Roblox, that’s Embark Technology, that’s AgEagle Aerial Systems. Twice a month, I write up these roughly 1000 word reports.

Edwin Dorsey (44:30):

I need to say, I don’t bet against the stock myself. I only make money from paid subscribers, and that’s what I do. It’s more popular among journalists, regulators, hedge funds, things of that nature, and just individuals like seeing me expose companies. So, that’s my job. My entire job is sending six emails every month. It works really well. Financially, I’m earning a ton more than I could at any fund. It has ultimate freedom for a 23 year old.

Edwin Dorsey (44:58):

And then another thing I launched recently is a newsletter called Sunday’s Idea Brunch, where I interview interesting investors every Sunday and publish a written interview where I ask them about their investment process, how do you research companies well? What are your top ideas? What do you do in the first hour research? I go out and I find great investors, usually through Twitter is how I approach people. And then the first half of the newsletter’s free, the second half is for paying subscribers. But interviewing a lot of great investors has been an interesting experience for me, too.

Clay Finck (45:31):

Very cool, Edwin. Thank you so much for coming on the Millennial Investing Podcast. For those in the audience that want to get connected with you, where can they go?

Edwin Dorsey (45:41):

They should Google Edwin Dorsey and follow me on Twitter, or check out The Bear Cave newsletter.

Clay Finck (45:48):

Yep. I’ll be sure to link both of those in the show notes. Edwin, thank you so much for coming on.

Edwin Dorsey (45:52):

Clay, thanks for having me. This has been awesome.

Clay Finck (45:55):

All right, everybody. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app, so you can get these episodes delivered automatically.

Clay Finck (46:03):

And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There, you’ll find all of our episodes, some educational resources we have as well, as some tools you can use as an investor. And with that, we’ll see you again next time.

Outro (46:18):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts, or courses go to theinvestorspodcast.com.

Outro (46:39):

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