Leverage is a double-edged sword

Leverage is a double-edged sword

June 18, 2023

Leverage is a double-edged sword:

Leverage is a double-edged sword.

Amplifies gains.

Also amplifies losses.

Great when things go up.

Horrible when things go down.

Don’t get over-leveraged.

Charlie Munger said 3 sins are ladies, liquor and leverage.

Pay attention to the last one.

Some billionaires are in hot water these days because of leverage.

Number 1 - Michael Jordan.

The last few weeks the media has been reporting that Jordan is selling his Hornets stake.

Everyone keeps talking about his return.

Bought in at 275 million. 

Selling for 3 billion.

But that’s not the big question.

It’s a distraction from the real story.

Who is he selling to?

Gabe Plotkin.

The guy who used to run Melvin Capital.

Remember the Melvin Capital that went bankrupt because of its Gamestop bet?

The one that last 5 billion dollars in a month because he made the wrong call?

Yea that guy.

You might be wondering - if this guy doesn’t have a hedge fund, how is he able to buy Jordan’s stake in the Hornets?

He’s not.

My guess is Jordan put up his stake in the Hornets as collateral.

He put money in Melvin and used his stake in the Hornets.

If he owed money to Melvin, they could just seize the Hornets.

Feels like exactly what’s happening.

Also heard another story through the grapevine.

A friend who is reasonably well connected in the Valley heard a rumour about Chamath.

You know the guy who called himself the next Warren Buffet, posted shirtless selfies of his tiny legs and swindled retail investors out of billions of dollars via his SPACs?

Yea that guy.

He sold his stake in the Warriors.

He came out with his long tweet storm about how now was the right time to get out.

But based on this rumour, he was forced to sell by the banks.

He might’ve put his Warriors stake as collateral when doing all these deals.

My bet is he was taking out tons of leverage on his Social Capital and Warriors assets to highly lever himself into these deals.

Then when the SPAC market turned, he was out and turned into a forced seller.

Sure he made an incredible return, just like Jordan, but why they sold their stake are the most interesting.

My bet is leverage.

Both of these guys were over-leveraged.

How many people are out there today in the same position?

My bet is a lot.

The issue when you’re rich is you can take out way more leverage than the average person.

But if asset prices start falling, you’re done.

Sadly a lot of bankruptcies are coming and people are about to lose everything.

It’s what happens when you take on too much leverage.

Remember, leverage is a powerful tool if you know how to use it but also extremely destructive when things turn for the worse.

Be careful.

Leverage is a double edged sword.

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Anish Kaushal

Hey there. I'm an Indo-British Canadian doctor turned healthcare venture capitalist. I read, write and obsess over sports in my spare time. Lover of Reggaeton music, podcasts and Oreo Mcflurries.
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Leverage is a double-edged sword

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Jun 18, 2023
Being over-leveraged, billionaires selling NBA teams and understanding the downsides of leverage

Leverage is a double-edged sword:

Leverage is a double-edged sword.

Amplifies gains.

Also amplifies losses.

Great when things go up.

Horrible when things go down.

Don’t get over-leveraged.

Charlie Munger said 3 sins are ladies, liquor and leverage.

Pay attention to the last one.

Some billionaires are in hot water these days because of leverage.

Number 1 - Michael Jordan.

The last few weeks the media has been reporting that Jordan is selling his Hornets stake.

Everyone keeps talking about his return.

Bought in at 275 million. 

Selling for 3 billion.

But that’s not the big question.

It’s a distraction from the real story.

Who is he selling to?

Gabe Plotkin.

The guy who used to run Melvin Capital.

Remember the Melvin Capital that went bankrupt because of its Gamestop bet?

The one that last 5 billion dollars in a month because he made the wrong call?

Yea that guy.

You might be wondering - if this guy doesn’t have a hedge fund, how is he able to buy Jordan’s stake in the Hornets?

He’s not.

My guess is Jordan put up his stake in the Hornets as collateral.

He put money in Melvin and used his stake in the Hornets.

If he owed money to Melvin, they could just seize the Hornets.

Feels like exactly what’s happening.

Also heard another story through the grapevine.

A friend who is reasonably well connected in the Valley heard a rumour about Chamath.

You know the guy who called himself the next Warren Buffet, posted shirtless selfies of his tiny legs and swindled retail investors out of billions of dollars via his SPACs?

Yea that guy.

He sold his stake in the Warriors.

He came out with his long tweet storm about how now was the right time to get out.

But based on this rumour, he was forced to sell by the banks.

He might’ve put his Warriors stake as collateral when doing all these deals.

My bet is he was taking out tons of leverage on his Social Capital and Warriors assets to highly lever himself into these deals.

Then when the SPAC market turned, he was out and turned into a forced seller.

Sure he made an incredible return, just like Jordan, but why they sold their stake are the most interesting.

My bet is leverage.

Both of these guys were over-leveraged.

How many people are out there today in the same position?

My bet is a lot.

The issue when you’re rich is you can take out way more leverage than the average person.

But if asset prices start falling, you’re done.

Sadly a lot of bankruptcies are coming and people are about to lose everything.

It’s what happens when you take on too much leverage.

Remember, leverage is a powerful tool if you know how to use it but also extremely destructive when things turn for the worse.

Be careful.

Leverage is a double edged sword.