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Bulls Make Money, Bears Make Money, and Pigs Get Slaughtered Thumbnail

Bulls Make Money, Bears Make Money, and Pigs Get Slaughtered

“Bulls make money, bears make money, and pigs get slaughtered.”

-Old Wall Street Aphorism


The following price chart for Tesla stock appeared in the Wall Street Journal on December 18, 2020.

It is both interesting and shocking, and brings back some scary memories!  In 1998, Mark Cuban (entrepreneur, owner of the Dallas Mavericks NBA team, star on the TV series Shark Tank, and more) sold the company (Broadcast.com, which he and a partner had founded just three years before) to Yahoo for approximately $5.7 billion in an all-stock deal.  For this sum Yahoo got a company hemorrhaging funds, having lost $16 million in the prior year on revenues of just $25 million.  For his part, Cuban received about $1.7 billion in stock, trading for about $200/share, which he was restricted from selling for three years.  Cuban then put on what turned out to be one of the greatest hedge trades in history.  He bought puts at $190 (guaranteeing he would never get less than that for the stock, or 95% of his stake) and completely financed their purchase by selling $305 calls (the most he could ever get for the stock if it rose above this price).  This is what is known as a “premium-free collar”.  He had to sell the calls because the cost of the puts alone was too much to afford (several hundred million dollars!).  The stock subsequently collapsed to $8/share, Cuban cashed in his puts and made the fortune that has propelled him since.

In retrospect, the trade seems like a no-brainer.  However, I was working at the time with private-wealth managers at a major global investment bank on the same and similar products.  It was very difficult to persuade investors who had large equity positions to put them on.  The problem was they had seen price action only like that of Tesla, they hadn’t “seen the future”.  Going back to Yahoo, when Cuban got the stock it had increased in value over 150% in just the prior month!  There were numerous Wall Street forecasts of it going to $1000 or more.  The thinking was “why give away the upside” by selling the calls when there was so much more possible!  Here is the price action in Yahoo and the point (arrow) when Cuban hedged his position:  

There are enough charts like the one above (JDSUniphase, Centillium, PowerWave Technologies, … ) to fill a book.  We are not saying Tesla is primed for a fall, now or later; it may continue to rise considerably more, flatten out, or crater – no predictions here!  However, it is interesting to look at things before we “know the future” – and heed old Wall Street aphorisms!

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