Leverage is a double-edged sword

Leverage is a double-edged sword:

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Leverage is a double-edged sword.

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Amplifies gains.

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Also amplifies losses.

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Great when things go up.

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Horrible when things go down.

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Don’t get over-leveraged.

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

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Pay attention to the last one.

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

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Number 1 - Michael Jordan.

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

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Everyone keeps talking about his return.

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Bought in at 275 million. 

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Selling for 3 billion.

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But that’s not the big question.

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It’s a distraction from the real story.

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Who is he selling to?

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Gabe Plotkin.

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The guy who used to run Melvin Capital.

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

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

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Yea that guy.

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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?

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He’s not.

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

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

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

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Feels like exactly what’s happening.

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Also heard another story through the grapevine.

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

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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?

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Yea that guy.

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He sold his stake in the Warriors.

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

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

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

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

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

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

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My bet is leverage.

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Both of these guys were over-leveraged.

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

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My bet is a lot.

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

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

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

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

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

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Be careful.

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Leverage is a double edged sword.

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