Be Fearful When Others Are Greedy
When Smart People Do Dumb Things
Chase Furey, according to The Wall Street Journal, is “a 25-year-old trader in Newport Beach, California.”
Educated at Harvard University, Chase recently convinced his parents to let him manage their $700,000 retirement account. He told the Journal that he’d created a “less dangerous and smarter” strategy for his parents. He put 100% of their account into two positions: shares of MicroStrategy (MSTR) and a 2x leveraged ETF that holds options on MicroStrategy stock. Chase expects Bitcoin to hit $400,000 and for MicroStrategy to increase by 10x… by next year. And, the strategy has worked so far: his parents’ capital has more than doubled!
The story reminds me, vividly, of a similar account I read in the same paper, in late 1999.
Back then a 25-year-old hedge fund wunderkind had, using the miracle of leverage, turned a small amount of seed capital into a $50 million fund in about 18 months, buying call options on the hottest tech-stock IPOs. He was making so much money that he began chartering private jets each weekend to Miami Beach. Of note: he required Count Chocula cereal to be stocked on every flight.
I certainly hope things go better for Chase Furey than they did for the Count Chocula trader, who ended up convicted of securities fraud and in jail. But, one way or another, when you’re deliberately seeking out the most volatile and inflated assets in the world at the very top of a multi-generational speculative bubble… there will be blood.
I suspect that Chase Furey doesn’t understand nearly as much about convertible bonds as MicroStrategy Executive Chairman Michael Saylor.
Saylor recently raised almost $3 billion in capital in a convertible bond, with a $672.50 strike price (a 55% premium to the current share price) and June 2029 maturity. This bond, which was only available to institutional investors (rule 144a) or foreign investors (Reg S), doesn’t pay any interest – none.
Simple question: why would sophisticated investors pay $3 billion to hold a bond that doesn’t pay any coupon and doesn’t deliver any upside until the stock trades at a 55% premium from the current price?
Makes no sense, unless you understand why hedge funds buy convertible bonds. These securities give you the right to convert the cash you’ve invested into shares, which means you can now short the stock with complete impunity. It’s a simple trade: you buy the bond, which enables you to short shares of MicroStrategy without any risk, unless the shares increase by another 55%.
Warren Buffett is famous for saying that it is wise for investors to be fearful when others are greedy and to be greedy only when others are fearful.
It’s not hard to recognize where we are now in regards to those extremes.
Good investing,
Porter Stansberry
Stevenson, MD
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