Two weeks ago, in the Pirates of Finance podcast, Jason Buck said “every great family wealth has been built on a great swindle”; you can imagine how I chuckled when I read this article on Bloomberg on how cocaine smugglers infiltrated the (now) world’s biggest shipping line, MSC.
To give you a bit of context Gianluigi Aponte, the MSC founder, went from 0 in 1970 to $19b today, not a shabby ride 😉 Everything is alleged, this blog does not provide any financial advice, so there are even fewer facts or investigative journalism around here. I am just a fan of The Wire and I can still remember that season 2 was taking place, guess what, around the shipping containers in the port of Baltimore.
Anyway. The PoF episode was about Leveraged Bets, how it is barely impossible for anyone to build wealth (a ton of it) without taking a huge amount of concentrated risk. It is a “timeless concept” as they get but it was funny because, besides the MSC thing, it connected with a few things I read/heard recently.
The Steven Bartlett interview with Richard Branson
The best way of taking advantage of compounding is to start as early as possible. I did not know that Richard Branson dropped out of school at 16 to start a magazine; and he did not do it voluntarily, it was the dean that forced him to choose between school and his entrepreneurial spirit.
Starting early is a swindle, a cheat, because you are not supposed to know what you want to do in life when you are 16 (besides being a football player or a singer); you are not supposed to know how to run a business and even less to have the guts to start one. It is also a form of a concentrated bet because, in the case of Sir Richard, he gave up education and eventually a degree. Sure, starting and running a company gives you a lot of experience points but who do you think has the better odds of being employed, a guy with a degree or a school drop-out that crashed and burned to create a teenager magazine? One of the main concerns me and my wife have with the Swiss school system is that it forces kids to choose too early what they want to do in life. Go read Annie Duke, the more you keep your optionality and the farther you become pot-committed, the better.
What if Branson was instead born in Japan in the ’70s or…in Ukraine in the ’00s? Was he the right person or was it the right place at the right time? He has a lot of business acumen but he also used a ton of financial leverage, even to literally bail himself out of jail; it is hard not to see the ‘what-if’ scenario and put him in an environment that was not that debt-friendly when he needed it the most.
For sure he is living proof that you need concentration to become rich but you need diversification to stay rich: he realized early enough the power of being a serial entrepreneur while leveraging ‘the Virgin brand’; as Steven pointed out during the interview, he broke the law of focus in business starting several companies. He is also a master of EXITING businesses, check his ‘partnership’ with Chamath and the Virgin Galactic SPAC (they did two public offerings, one at $10 and the other at $19.5):
Timing, timing, timing. I am not 100% sure this story belongs to this post but I had it in the ‘archive’ for a long time so….here we are.
As you might know, I use Seedrs to remind myself I would be a very bad VC/angel investor. In June 2019, I saw the pitch for youngplatform.com, an intuitive crypto-exchange for a new generation of investors with an innovative acquisition tool. The innovative acquisition tool was a token (YNG) that the user would earn by simply walking. Combine this with the fact that Coinbase was already a powerhouse and you can guess why I was sad there wasn’t a “short this” option on Seedrs (they were raising at a pre-money valuation of 8.5m because…why not?).
Flash forward to this summer, when Three Arrows and Celsius and BlockFI (the first time) defaulted.
I mean, this happened for real. On the first of July 2022, YoungPlatform raised 16m in a new round that valued the company 85m. I was a bit disoriented, to say the least (and also less cute than Natalie Portman). Was I wrong in thinking that coming 314th in an overcrowded market, starting out of (frankly irrelevant) Italy was less important than how the guys executed and grew the user base (on the back of a walking app)?? Will my call be lucky just because SBF revealed himself as the fraudster GOAT?
Maybe I am too old and when I think about launching such an app the critical differentiating aspects that come into my mind are all technical, while in reality the killer feat is confetti when the user closes a trade. I still remember though back in 2015 (can it be?) I went to Banca Sella, pitched them a saving app and they told me “no thank you, we just develop in-house”. They were part of that 85m round…
JasonDeBolt
“Stubbornness is what let Russell Westbrook into the NBA. Stubbornness is what will drive him out” I am pretty sure Russillo said it….last year? Truth be told, Russ seems to have changed this year, so this quote might not age well.
Anyway, I wanted to write about Jason but it looks like Nick Maggiulli beat me to it. If you do not know who he is, and you do not want to read Nick’s post, he’s a guy who went all-in Tesla years ago and at a certain point had a position worth 12m. The guy was an average lad and became a millionaire. I still remember it because at the time I told my wife the whole story…and how it would end. As predicted by many (I am not that smart), not only he didn’t cash-in not even a fraction of that 12 m, he is now planning to sell his house to buy even more shares…while Elon dumped 33b of Tesla shares and counting.
What makes you rich is what drives you to ruin.
It is the stock-picker curse: you buy stuff, they go up and you feel like a genius. And when you lose it all, you realize it was just a bull market that turned into a bear one. Meb Faber, who is the godfather of the become rich vs stay rich portfolios, ends each episode of his podcast asking his guest what is their most memorable investment, “good or bad or anything in-between“. Here is mine.
The SARAS IPO
It is 2006 and the world is in the middle of a commodity super-cycle initiated by China joining the WTO in 2001. Since then, the price of oil is up 233%. State Street launched the gold trust EFT ($GLD) at the end of 2004, the first commodity ETF in the US; from there, the amount invested in commodity ETFs went from virtually nothing in 2005 to more than $80b in 2010. Everyone was bullish oil&friends…as much as everyone was bullish on tech stocks just a few years before: no one learns, me included.
It is in this environment that Saras, a leading European oil refining company based in Italy, decided to do its IPO. To add more spice to a plot that was already white-hot, the Saras story is intertwined with my favorite Italian football club, FC Inter. The founder of Saras was the owner of FC Inter and in the ’60s they won two Champions Leagues (different name, same s**t). After that period, Saras sold the club and FC Inter went through a long period of disappointment, until in 1995 the son of Saras founder bought back the club and flooded it with cash and talent.
That was basically my whole due diligence: the company ‘produces’ gasoline (sigh) and its price can only go up, plus its owner is spending boatloads of money to acquire football players so the business must be indeed super-profitable.
One of the most common mistakes young traders (??) make is to start while being undercapitalized. Undercapitalized compared to the trading fees online brokers charge, undercapitalized in relation to the number of trades they can have simultaneously open, undercapitalized in respect of minimum trading size. The minimum lot to participate in the Saras IPO was around €5k (cannot remember if it was 4 or 6) and that was more or less half of my capital at the time. I have been focused on risk management rules even before I started trading, so to be honest it took me a bit to say fuck it, let’s do it. It felt like a rite of passage, a sort of level up; it definitely helped the fact that I did not have to place the order with a real person but I just had to do some clicks on my broker website and…done.
The IPO process is exciting because it takes days, after you expressed your interest to participate, to know if you would be assigned any shares. The final IPO share price is also not yet defined, there is a ‘fork’ of prices, and during that period some comments started to surface expressing concerns that Saras’ price was too high. I dismissed those concerns thinking those people were just perma-bears too attached to the .com crisis that just passed. In the end, I got my full allotment of shares and Saras priced the IPO at the top of their range, €6/share.
The newspaper headlines of gains of 100%, 200% on the first day of listing were still vivid in my mind, 1999 and 2000 were just around the corner. What is still vivid in my mind today was my total disbelief when I turned on my pc on the morning of the 18th of May 2006 and the price was €5.4. Something must be wrong, I thought. I refreshed the page multiple times, I checked the news: it was real. The price shortly bounced to 5.6 and then it moved only in one direction: down. Hey, it is just the first day. Tomorrow stronger hands will arrive. Down the second day to 5. Down the third day to 4.8.
I do not remember when and how I sold, if I got rid of all the shares in one go or if I prolonged my agony by selling smaller lots to keep the hope alive. At this point I think you can get the lessons without me listing and detailing them: do your research in full, understand what you are doing, size bet correctly, etc etc.
Considering Jason’s story, I wonder what would have happened if this trade went to the moon as I expected. How much additional risk I would have taken in the subsequent trades? How much cockier, and more confident, I would have felt also in my professional life? Was it a blessing in disguise or it prevented me to open doors I was (I am) too afraid to reach?
Probably I just got the worst of both worlds: I lost money in the IPO and I did not stop trading products with a minimum size too big for my portfolio. I just moved from IPOs to selling naked puts (once I got assigned while vacationing in Malaysia and ruined my experience as well as my P&L). At least I learned that if you are a small fish, you only get assigned an IPO if it is a shitty one…which is also a good way to frame the opportunity you see on Seedrs, ie only deals that more intelligent VCs already passed on.
For all the lads kneeling at the altar of John Bogle, this is what would have happened if I invested the Saras money in the S&P500:
From Saras to Soros
Looks like the challenge is not only nailing the trade/entrepreneurial endeavor that will make you rich, is it as well to finds it within yourself to switch strategy before you go back to rugs.
Funny enough, successful traders have to do the reverse to ‘step up’. Here is how Sebastian Mallaby chronicles the key moment before the collapse of the British Pound in his book “More Money Than God”:
Druckenmiller could see that Soros was right: Indeed, this was the man’s genius. Druckenmiller had done the analysis, understood the politics, and seen the trigger for the trade; but Soros was the one who sensed that this was the moment to go nuclear. When you knew you were right, there was no such thing as betting too much. You piled on as hard as possible.
Traders have to follow strict risk management rules to survive; but they also have to recognize the moment when to put those rules to bed and ‘go for the jugular’.
Or as Tom Cruise says “Don’t be careful, be confident“.
What I am reading now:
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