Investing based on rap songs is a bad idea

This week, I had a profound thought. It was so profound, that I almost fainted. You can read and find out what it is. Be warned, it’s profound.

The greatest trick the devil ever pulled was convincing the world that nonsense like fundamentals, valuations, technicals, cashflows, moats and boats mattered.

Anyone who’s read books on valuations, fundamentals, economics and followed that advice has looked like an absolute moron in the last decade. So, smart investors have broadly done two things. The boring and the busy investors invested in index funds and went on with their lives. The other smart and more active investors took a different approach to achieve financial freedom. Instead of waiting for freedom, they decided to make their own by pumping and dumping stocks like GameStop and AMC.

But there’s a third category of investors – the lazy people who think they are smart but, in reality, have the IQ of a Salman Khan movie poster. Now, these people don’t want to do the hard work like the smart people. They aren’t happy with index fund returns, nor do they want to join the apes and degenerates on WallStreetBets and pump and dump stocks. So, they listen to other “smart people”.

Hustle is a British TV series. It’s about a group of con men who pull off intricate long cons. There are
three rules of cons in the show which are quite apt to what we’ll talk about:

“If it looks too good to be true then it probably is!”
“You can’t con an honest man.”
“Don’t be a mark.”

Now there are plenty of talented income redistributors (scamsters & frauds) who read TheTipsheet. They are just waiting to redistribute income from the stupid people to themselves. Recently, one of the most popular options has been a structure called a special purpose acquisition company (SPAC). Now, in a country like India, if you want to list your company on the stock exchanges, the main thing you need is a company and some revenues.It need not be making profits. In fact, slowly all the investors who were brainwashed into believing in nonsense like profitability are un-brainwashing themselves and have seen the light. Today, the higher the negative profits (losses), the more valuable the company.

But in the US and other developed countries, that’s not the case. There’s a special type of company called a SPAC; it’s also called a blank check company. The way a SPAC works is it IPO’s and lists on the exchange without any business or operations. It later goes and acquires or merges with a public or a private company from the money raised and lists. SPACs usually have a time limit of 18-24 months to find a deal.

In most cases, SPACs sell units for $10 when they launch. If the company that the SPAC merges with or acquires is good, the hope is that this $10 grows and you make money. The sponsors or the people who form the SPAC typically get 20% of the SPAC equity for all their hard work. It’s quite a sweet deal.

Since 2020, there’s been a massive surge in the number of SPACs. This is because SPACs are a much easier way of listing on the exchanges than the traditional IPOs. The other reason for the popularity of SPACs is that there’s too much money chasing high returns across the world.

But, the reality has been that most SPACs have been absolutely shitty and, in some cases, downright scammy. Take the case of Nikola, the much-hyped electric car manufacturer, it listed by merging with a SPAC at a $3 billion+ valuation. But it turns out the company was basically useless. After the merger, the founder was sued for fraud, and the stock is down by over 85% from its peak.

Then there’s LUCID, another EV maker that merged with a SPAC at a valuation of $24 billion. The company is years away from a product, and stock is down by over 50% from its peak. Akazoo touted itself as one of the best music streaming services, it merged with a SPAC and was listed on NASDAQ. It turns out it was a complete and utter fraud. It was sued, and it was delisted after settling a lawsuit.

Here’s how the SPAC index has performed. For every good SPAC, there are dozens of horrendous ones:

Anyway, remember Bill Ackman, the famous investor? Last year, Bill’s SPAC – Pershing Square Tontine Holdings raised $4 billion, it was the largest SPAC ever and started looking for acquisition/merger targets. Typically, most SPACs either do full mergers ot acquisitions. But Billy boy decided to be a little fancy. In June this year, Pershing Tontine agreed to buy 10% of Universal Music Group (UMG), the world’s largest record label that holds music rights to albums by artists like Taylor Swift, Kanye, Rihanna etc. Now, the way the deal was structured was so complicated, I decided to call it the bad hair day of SPAC deals. Good joke, no?

The price of the SPAC fell, but things still seemed to be on track until the U.S. Securities and Exchange Commission (American SEBI) decided to flex its 6 packs. It said that the deal didn’t qualify, so Bill had to cancel the acquisition.

Now, here’s where the fun part comes in. Bill Ackman is a well-known investor, he’s also called Baby Buffett. He recently turned $27 million into $2.6 billion.

Anyways, give that he’s a “star investor”, he has quite a fan following. When he announced his SPAC, plenty of people piled into it, ordinary non-Bill Ackman people can’t raise $4 billion to do whatever they want. That’s the power of Bill. Well, everybody wanted a piece of Bill and started betting on the SPAC. Bill even tweeted a rap song on SPACs.

The lyrics sum up the zeitgeist:

We been on some of the same SPACs since way back
I’m really long, on Hylion, wit’ J-Mac
Bill SPACman, help me pay my bills
And I can’t forget the Stock Watch, that boy got skills
Let’s get rich, stocks only goin up, never shrinkin’
Suits hate on Dave Portnoy but he say what we thinking
Now the warrants, oo-wee, you better watch yo self
If you don’t get em for the low then they might squash yo wealth

Now, it gets more fun here. Unlike India, most securities in the US tend to have options, including SPACs.And given the environment we’re in, there’s no shortage of degenerate gamblers.

Enter the person who goes by the anonymous name of Krurd. He’s the son of Indian immigrants and is a psychiatrist by training. Apparently, he heard that Billy boy’s SPAC is the shiz and decided to invest all his life savings to buy call options on the SPAC. Not the SPAC, but call options on the SPAC:

Raised in California as the son of Indian immigrants — his mom was a teacher, his dad an IT consultant — he had no expertise in finance but started playing the market with the extra money he had earned moonlighting as a resident doctor. In two years, he had saved more than $300,000. (The psychiatrist asked that II not reveal his name.)

By March, the psychiatrist was plunking all of his capital into call options on Tontine, which goes by the stock symbol PSTH. “Whatever money I had, I pretty much was putting it all into buying more of it,” he says. At one point, his stake in Tontine was worth over $1 million on paper. He lost it all when his June 18 calls — with a strike price of $25 — expired worthless; the stock was around $23 at the time.

And when Bill announced that he’s just buying 10% of Universal and not fully acquiring some hot unicorn, the markets were pissed, the prices fell, and the good psychiatrist became the real-life version of this meme👇

This Reddit thread is full of sob stories of lazy people who believed in Billy boy but got a premium royal shaft.

The moral of the story is that if you’re a lazy idiot and follow “star investors”, they’re going to take your money. It’s as simple as that. If you’re lazy, the smart thing is to invest in index funds, not fucking buy call options on JP Associates like companies. And for fuck’s sake, if you’re a high IQ person like a doctor or a psychiatrist, please act your IQ. When you do dumb shit like this, you end up becoming a black mark on your peers. Don’t be that guy.

There’s money to be made

Now, my fellow income redistributors, up until today, we’ve only spoken about how to make money in ways, what most prudish people call “illegally”, whatever that means. However, stock markets are full of lazy idiots who willing want to lose money. Now, not relieving those people of their money is illegal. If someone wants to lose money willingly, it’s unethical not to take that money. God doesn’t look kindly on it.

SPACs, in my opinion, are the easiest way to steal money from people legally. Here’s an analysis of investor returns vs sponsor returns in SPACs by Michael Cembalest of JP Morgan:

The median return is 400%. That’s madness. Even in some of the income redistribution schemes, which people call “illegal”, whatever that means, the returns aren’t that high. And this is the perfect environment to make money in SPACs. What’s more, according to news reports, SEBI is also considering allowing SPACs in India.

The reason why you can make a lot of money from idiotic investors in SPACs is because of the mega shift from public to private markets in the last 25-30 years. With the rise of large pools of institutional money like sovereign wealth funds, pensions, and PE funds, young companies could raise funds easily and hence remain private longer. Otherwise, they would’ve had to go public and raise money, which is a nightmare.

And with the easy availability of capital, there are more startups/private companies at any given point in history. Now, when someone invests in a startup, the only way they make money is if the company lists or if they can sell their stake, but mostly IPO. Now, the thing is, most of these startups either won’t make it or have really terrible business models are, in some cases, downright frauds like Theranos.

That means there are more investors who want their money back but are stuck in companies that won’t fit the bill for a traditional IPO. Like we saw above, SPACs are a brilliant way to merge with shitty companies. It’s a backdoor IPO. The sponsors and the early investors can basically spin a bullshit story about AI, ML, future, blockchain, hip replacements etc and Sell Packaged Crap (SPAC).

The icing on the cake is that for providing this social service, you get the advantage of making at least 20% of each deal. Launching SPACs, merging with terrible companies, and getting your 20% is probably the easiest way to make money. No wonder everybody from Billy Beane (Moneyball), JayZ, Serena Williams, to Shaquille O’Neal are getting involved. It’s easy money, my dear income redistributors.

Crypto is hack-proof

Last week, a talented income redistributor hacked Poly Network and stole $600 million, in what was the largest crypto hack ever. Poly Network is a Chinese project, there’s a made in China joke somewhere in there. The only other hack that’s even comparable is the $460 million Mt. Gox hack in 2014.

Here’s what happened. Just like we have multiple stock exchanges like BSE and NSE, there are multiple blockchains like Ethereum, Polygon, Binance Smart Chain etc, each with its own ecosystem of crypto projects. But, by default, these blockchains aren’t interoperable. This is where Poly Network comes in. It acts as a bridge between various blockchains and allows you to swap tokens and transact on other blockchains.

In simple terms, the hacker took advantage of a flaw that allows him to modify a function that he shouldn’t have been able to. Here’s a more technical explanation:

So, the hacker sent a bunch of fake messages and stole $600 million worth of tokens across three blockchains. Tether, the issuer of the USDT stablecoin immediately froze the $33 million in stolen USDT tokens. So much for no central authorities and decentralization😂:

Here’s where things get crazy.

As the hacker was moving the stolen USDT, someone tipped him off that he was blacklisted and in return, the hacker paid this guy $42,000 dollars. What a generous largehearted hacker:

Immediately after, there was a flurry of messages in the hopes of getting a tip. Some of these messages are hilarious. Here are a few from this thread:

  1. When money realizes that it is in good hands, it wants to stay and multiply in those hands.
  2. Dear righteous man, can you transfer some money to me. I need money badly. thank you! You're out.
  3. Hell. Please dont skip this message. Please. Im a refugee from Lebanon living in Leon France for 4 month on asylum in hardest human conditions. Im beating my life and moral for what it give me - unfair chance of birth place. Its very hard for me. I exchange my bitcoin saving for ethereum to send you this message to see. It worth o to help me stay alive and get to society in france but for me it worth my life! Dear human I hope on you and pray

After the hack, Poly Network posted a tweet that loosely translates to “If you don’t return my money, I’m telling my mom and dad and my dad’s cop brother”:

And the hacker agreed and as of this writing, he’s returned all of the money. There were reports that a blockchain security firm called Slowmist had figured out the hacker’s identity and this might be the reason, but who knows. The craziness didn’t end there. The hacker was gracious enough to do lengthy Q&A and explained his motivations:

Has this ever happened in traditional finance? There have been countless bank robberies, but have the bank robbers ever taken the time to clarify their intentions? This is why DeFi will destroy traditional finance. I am now a true crypto believer. I’m going to start HODLING and paying for my underwear purchases in Dogecoin. This goes to show, crypto is 100% hackproof. Because if you get hacked and you ask nice and the hacker returns the money, it’s not really a hack.

So, the moral of the story is that whenever something of yours is stolen, ask nicely for it to be returned.

A few good reads

You Don’t Live In A Spreadsheet

Magic beans

Business History with Gary Hoover

Do Short Term Flows Permanently Affect Share Prices?

NFTs, Liquidity, and the Attention Economy (Part 1)

Super Stonks! AMC Entertainment Holdings

The Opening – AVC

The Future of Quant Equity

The Active vs Passive: Smart Factors, Market Portfolio, or Both?

Is value dead and if so, since when?

Non-finance stuff

Operation Fox Hunt: How China Exports Repression Using a Network of Spies Hidden in Plain Sight

How Big Beverage poured empty promises down our throats

The Great Master’s-Degree Swindle

Elon Musk’s Trip Through Hell: Inside the 2018 Scramble to Avoid the Collapse of Tesla

A few good tweets

Emil in your inbox thingy

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