Third deadly sin: greed. MicroStrategy
We could say that greed is the most common flaw an investor can have, and surely many people who have never invested think that everyone is like that. But could they be right? Actually, not necessarily. An investor's main objective should be to preserve their capital and earn a reasonable profit. Then, what they do with their money is another matter: whether to donate it, share it, or enjoy it for themselves. But if one is very stingy in their investments, it can backfire.
As we've seen, although trees don't grow to the sky, greed prevents us from seeing when we're doing something wrong, even if we're making money. This happens particularly when a company or the market in general rises sharply in price. Logically, that's what we all want, but if we've made a rough and proper calculation of what value we can expect, we should sell if we're paid more for something that isn't worth it. Or maybe we don't own that stock, and we see it keep rising, and we want to jump on the "joy train."[1] also.
This is probably what MicroStrategy investors were thinking. Even the name sounds similar... who wouldn't have liked to own the next Microsoft? By the end of the last century, things were going well for MicroStrategy. By 1999, the stock had risen 566.71%, and according to its CEO, the future was even brighter.
But things didn't go well, as MicroStrategy was soon accused of accounting fraud, and the CEO had to pay a hefty fine to have the charges dropped. Meanwhile, the dot-com bubble burst, and the company's fall was dramatic: in March 2000, it was valued at $3,130. But by the end of 2002, it was worth $15.10. A drop of 99.5%!
With all this in mind, we might think... all companies fell in the Dot-Com crash... Sooner or later, prices should recover. Well, whoever thought that... still has to wait! As you can see from the chart, if you waited that long, and were lucky enough to sell during the rally in early 2021, you would only recover 30% of what it was worth some 21 years ago. For those who were greedy and bought in the midst of the rally without analyzing the company in depth, the market taught them a harsh lesson.
The curious thing is that, when the book The Pocket Investor Three was written, MicroStrategy was again in the news in the economic media as they announced their desire to issue new debt worth 400 million dollars to buy more Bitcoin.[2]This placement exceeds the company's entire operating cash flow since 2016. Furthermore, the company announced it will take a $284.5 million charge during its earnings report for losses caused by digital currency fluctuations. This amount exceeds its profits since 2011!
Fourth deadly sin: envy. Stanley Druckenmiller
Envy is a very negative feeling for any investor. After taking our time analyzing companies, we may find two that are very similar. They do the same things, trade at the same multiples. We might decide to go with one. But of course... the one we chose is now going down, and the other is going up. To top it all off, someone we know bought the other one and is happy as a dog with two tails. And that's when envy takes over... but the worst can come later, as it can lead us to do something foolish. Charlie Munger, Warren Buffett's partner, put it very aptly:
“The idea that we care that someone else is making money faster than we are is the deadliest sin of all. Envy is actually a stupid sin because it's the only one you can't possibly get any fun out of. It just produces a lot of suffering and no fun. Why would you jump on that bandwagon?”[3].
Stanley Druckenmiller is one of the most successful macro investors in history. In 1992, he participated with George Soros (arguably the most important macro investor in history) in the short sale of the British pound, which yielded astronomical profits. For someone with a record of winning 30% for 30 years, he certainly wouldn't be amused to see others outperform him.
Some of this had happened in 1999. He was coming off a tough few years, particularly the Russian crisis and the Long Term Capital Management crisis we saw earlier, but he had been able to weather them all with profits nonetheless. But with the dot-com boom, he seemed to have lost his touch. He shorted some of these companies,[4] but they kept rising, costing him $600 million, and by May 1999 the fund was down $18% for the year.
On the contrary, a young investor he had hired, trading these technology companies, achieved very good results, allowing the fund to close the year with profits. Druckenmiller tried his luck again in his field of macro investments, betting on the euro, but again, things didn't go well. At that moment, he decided to betray his instincts and jump into the dot-com bubble.
He bought VeriSign, first at $50 and then at $240, doubling down. When the bubble began to burst, the company began to plummet, reaching $135. Profits peaked in March 2000, but in less than a month, the entire Nasdaq index had fallen by 341% in profit. Druckenmiller's fund closed that year with a loss of 211% in profit.
Fifth Deadly Sin: Lust. Jordan Belfort
Lust is defined as an excessive, uncontrolled sexual appetite. But it also has a non-sexual connotation, which is when it refers to the passionate desire to possess something. Many people view the stock market, or investments in general, as a means to satisfy their lust.
Maybe they start by dreaming of a nicer cell phone or sneakers, then a better car, maybe even a bigger, more comfortable house… and then these dreams escalate to increasingly refined (and often unnecessary) tastes, like luxury yachts, summer homes here and there… in short, the list of desires a human being can have is endless. What is certain is that as long as someone has this attitude of wanting more, they will never be happy. Being content with what they have is quite another matter, and whether or not they can buy something better tomorrow, they will still be happy.
This is what happened to Jordan Belfort. His name may not be familiar to you, but the movie "The Wolf of Wall Street," which is based on his real life, is. He started working in meat and seafood sales, becoming quite successful, but eventually things went south and he declared bankruptcy. He then started working at a firm as a stockbroker, but was fired.
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In the 1990s, Jordan Belfort founded Stratton Oakmont, a company dedicated to the over-the-counter (OTC) market. It soon became the largest firm in the United States in this field, responsible for the IPOs of 35 companies.
This company's profits were astronomical because it engaged in pump-and-dump schemes, which involve inflating the price of small-cap companies through false statements or other "schemes" and then selling them at a higher price. Of course, by the time the truth came out, they had already sold their shares at an extremely high price, defrauding investors.
Instead of focusing their money on honest gains, both Jordan Belfort and his colleagues gave in to lust. He became famous for holding huge parties in the office, where drugs and sex were commonplace. Euphoric from earning $50 million a year, he became known for purchasing one of the world's most exclusive yachts, originally intended for Coco Chanel. Even the mafia began to take a closer look, shocked by his incredible lifestyle.
But lust eventually claimed a new victim, and the FBI began investigating him. In 1998, Jordan Belfort was charged with fraud and money laundering. He ended up spending nearly two years in prison and having to pay a $100 million debt, which he continues to pay to this day.
As he himself acknowledged, he proved to be emotionally immature by always wanting the best: the presidential suite, the best car, the most expensive wine, the most stunning blonde... he wanted to be the most dazzling rich man. Yet another example of how the seven deadly sins condemned him.
[1]The Train of Joy is one of the many names of those trains (buses, actually) that take children for rides around the city, and which usually have costumed characters inviting people to get on (obviously for a fee).
[2]Source: https://es.investing.com/news/cryptocurrency-news/las-acciones-de-microstrategy-se-desplomaron-tras-anunciar-un-nuevo-augmentación-de-deuda-de-usd-400-millones-para-comprar-mas-bitcoin-2124895
[3]Source: https://spa.coin-group.com/emotional-intelligence-5-lessons-for-investors-from-charlie-munger-brk-7697
[4]Short selling is the process of making money when a stock's price falls. It involves renting a stock and selling it, which yields high profits if the price falls. If the price rises, the losses can be unlimited, since closing the position requires buying back the stock at an unknown (and high) price.
This article is part of Chapter 4 of the book "The Pocket Investor Three: Investing for Life." You can purchase it in our store.
You can see the first and third parts below:
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