Letter #37: Mark Cuban (2004)

Owner of the Dallas Mavericks | Foreword to Alex Berenson's 2004 book The Number

Hi there! I go by KG, and I love studying the history of business and investing. I’ll be sharing some notes from one Investor/Shareholder letter per weekday (mostly from my compilations) here.

Today’s notes are on Mark Cuban’s forward to Alex Berenson’s 2004 book The Number. In it, he touches upon his experience bringing his company to market — particularly interesting reading given the rampant discussion surrounding “The IPO Pop,” SPACs, and Direct Listings.

For more on Mark, check out my Mark Cuban compilation under Consumer/Retail Operators. This essay is featured on page 46.

*Note: Trying out a new format here (for this week) — Letter printed in full followed by annotated letter. If you like this format, please let me know by dropping me a line via kevin@12mv2.com or commenting below. Otherwise, I’ll be returning to the old format (just annotated letter) next week.

The Letter

I get asked all the time to write a book about business and my approach to it. I’m not ready to take that leap yet, but along the way, when I find a book that really impresses me, I try to help it find an audience.

In this case, it wasn’t long ago I read my now favorite book about the stock market called The Number by Alex Berenson. I liked it so much, I volunteered to write the forward for the paperback edition which comes out this week.

Here is the foreword I wrote for The Number. I recommend that anyone with an interest in the market jump at the chance to buy it.

In 1990, I sold my company, MicroSolutions which specialized in what at the time was the relatively new business of helping companies network their computer equipment to CompuServe. After taxes, I walked away with about $2 million. That was going to be my nest egg, and my goal was to protect it at all costs, and grow it wisely.

I set about interviewing stockbrokers and settled upon a broker from Goldman Sachs, Raleigh Ralls. Raleigh was in his late 20s, and relatively new to Goldman. But we hit it off very well and I trusted him. As we planned my financial future, I made it clear that I wanted my nest egg to be invested not like I was 30 years old, but as if I were 60 years old. I was a widows and orphans investor.

Over the next year I stuck to my plan. I trusted Raleigh, and he put me in bonds, dividend-paying utilities and blue chips, just as I asked.

During that year, Raleigh began asking me a lot of questions about technology. Because of my experience at MicroSolutions, I knew the products and companies that were hot. Synoptics, Wellfleet, NetWorth, Lotus, Novell and others. I knew which had products that worked, didn’t work, were selling or not. How these companies were marketed, and whether or not they were or would be successful.

I couldn’t believe that I would have an advantage in the market. After all, I had read A Random Walk Down Wall Street in college. I truly thought that the markets were efficient, that any available knowledge about a company was already reflected in its stock price. Yet I saw Raleigh using the information I gave him to make money for his clients. He finally broke me down to start using this information to my advantage to make some money in the market. Finally after more than a year, I relented. I was ready to trade.

Notice I didn’t use the word invest. I wasn’t an investor. I just wanted to make money. The reason I was ready to try was that it was patently obvious that the market wasn’t efficient. Someone like me with industry knowledge had an advantage. My knowledge could be used profitably. As we got ready to start, I asked Raleigh if he had any words of wisdom that I should remember. His response was simple. “Get Long, Get Loud”.

Get Long, Get Loud. As we started buying and selling technology stocks, most of which were in the local area networking field that I had specialized in at MicroSolutions, Raleigh put me on the phone with analysts, money managers, individual investors, reporters, anyone with money or influence who wanted to talk technology and stocks.

We talked about token ring topologies that didn’t work on 10BaseT. We talked about what companies were stuffing channels – selling more equipment to their distributors than the distributors really needed to meet the retail demand. We talked about who was winning, and who was losing. We talked about things that really amounted to the things you would hear if you attended any industry trade show panel. Yet after hanging up the phone with these people, I would watch stocks move up and down. Of course as the stocks moved, the number of people wanting to talk to me grew.

I remember buying stock in a Canadian company called Gandalf Technologies in the early 90s. Gandalf made Ethernet bridges that allowed businesses and homes to connect to the Internet and each other via high-speed digital phone lines called ISDN.

I had bought one for my house and liked the product, and I’d talked to other people who’d used it. They had decent results, nothing spectacular, but good enough. I had no idea Gandalf was even a public company until a friend of Raleigh’s asked me about it. What did I think about Gandalf Technologies? It was trading at the time at about a buck a share. It was a decent company, I said. It had competition, but the market was new and they had as much chance as anyone to succeed. Sure, I’ll buy some, and I would be happy to answer any questions about the technology. The market size, the competition, the growth rates. Whatever I knew, I would tell.

I bought the stock, I answered the questions, and I watched Gandalf climb from a dollar to about $20 a share over the next months.

At a dollar, I could make an argument that Gandalf could be attractive. Its market was growing, and compared to the competition, it was reasonably valued on a price-sales or price-earnings basis. But at $20, the company’s market value was close to $1 billion – which in those days was real money. The situation was crazy. People were buying the stock because other people were buying the stock.

To add to the volume, a mid-sized investment bank that specialized in technology companies came out with a buy rating on Gandalf. They reiterated all the marketing mishmash that was fun to talk about when the stock was a dollar. The ISDN market was exploding. The product was good. Gandalf was adding distributors. If they only maintained X percentage of the market, they would grow to some big number.  Their competitors were trading at huge market caps, so this company looks cheap. Et cetera, et cetera.

The bank made up forecasts formulating revenue numbers at monstrous growth rates that at some point in the future led to profits. Unfortunately, the bank couldn’t attract enough new money to the stock to sustain its price. It didn’t have enough brokers to shout out the marketing spiel to entice enough new buyers to pay the old buyers. The hope among the “sophisticated buyers” was that one bank picking up coverage would lead to others doing the same. It didn’t happen. No other big investment banks published reports on the stock. The volume turned down.

So I did the only smart thing. I sold my stock, and I shorted it to boot. Then I told the same people who asked me why I was buying the stock that I had shorted the stock. Over the next months, the stock sank into oblivion. In 1997, Gandalf filed for bankruptcy. Its shares were canceled – wiped out – a few months later. I wish I could take credit for the stock going up, and going down. I can’t. If the company had performed well, who knows what the stock would have done?

But the entire experience taught me quite a bit about how the market works. For years on end a company’s price can have less to do with a company’s real prospects than with the excitement it and its supporters are able to generate among investors. That lesson was reinforced as I saw the Gandalf experience repeated with many different stocks over the next 10 years. Brokers and bankers market and sell stocks. Unless demand can be manufactured, the stock will decline.

In July of 1998, my partner Todd Wagner and I took our company, Broadcast.com, public with Morgan Stanley. Broadcast.com used audio and video streaming to enable companies to communicate live with customers, employees, vendors, anyone with a PC. We founded Broadcast.com in 1995, and we were well on our way to being profitable. Still, we never thought we would go public so quickly. But this was the Internet Era, and the demand for Internet stocks was starting to explode. So publicly traded we would become and Morgan Stanley would shepherd us.

Part of the process of taking a new company public is something called a road show. The road show is just that. A company getting ready to sell shares visits the big mutual funds, hedge funds, pension funds – anyone who can buy millions of dollars of stock in a single order. It’s a sales tour. 7 days, 63 presentations. We often discussed turning up the volume on the stock. It was the ultimate “Get Loud.” Call it Stockapalooza.

Prior to the road show, we put together an amazing presentation. We hired consultants to help us. We practiced and practiced. We argued about what we should and shouldn’t say. We had Morgan Stanley and others ask us every possible question they could think of so we wouldn’t look stupid when we sat in front of these savvy investors.

Savvy investors? I was shocked. Of the 63 companies and 400-plus participants we visited, I would be exaggerating if I said we got 10 good questions about our business and how it worked. The vast majority of people in the meetings had no clue who we were or what we did. They just knew that there were a lot of people talking about the company and they should be there.

The lack of knowledge at the meetings got to be such a joke between Todd and I that we used to purposely mess up to see if anyone noticed. Or we would have pet lines that we would make up to crack each other up. Did we ruin our chance for the IPO? Was our product so complicated that no one got it and as a result no one bought the stock? Hell no. They might not have had a clue, but that didn’t stop them from buying the stock. We batted 1.000. Every single investor we talked to placed the maximum order allowable for the stock.

On July 18, 1998, Broadcast.com went public as BCST, priced at 18 dollars a share. It closed at $62.75, a gain of almost 250 percent, which at the time was the largest one day rise of a new offering in the history of the stock market. The same mutual fund managers who were completely clueless about our company placed multimillion orders for our stock. Multimillion dollar orders using YOUR MONEY.

If the value of a stock is what people will pay for it, then Broadcast.com was fairly valued. We were able to work with Morgan Stanley to create volume around the stock. Volume creates demand. Stocks don’t go up because companies do well or do poorly. Stocks go up and down depending on supply and demand. If a stock is marketed well enough to create more demand from buyers than there are sellers, the stock will go up. What about fundamentals? Fundamentals is a word invented by sellers to find buyers.

Price-earnings ratios, price-sales, the present value of future cash flows, pick one. Fundamentals are merely metrics created to help stockbrokers sell stocks, and to give buyers reassurance when buying stocks. Even how profits are calculated is manipulated to give confidence to buyers.

I get asked every day to invest in private companies. I always ask the same couple questions. How soon till I get my money back, and how much cash can I make from the investment? I never ask what the PE ratio will be, what the Price to Sales ratio will be. Most private investors are the same way. Heck, in Junior Achievement we were taught to return money to our investors. For some reason, as Alex points out in The Number, buyers of stocks have lost sight of the value of companies paying them cash for their investment. In today’s markets, cash isn’t earned by holding a company and collecting dividends. It’s earned by convincing someone to buy your stock from you.

If you really think of it, when a stock doesn’t pay dividends, there really isn’t a whole lot of difference between a share of stock and a baseball card.

If you put your Mickey Mantle rookie card on your desk, and a share of your favorite non-dividend paying stock next to it, and let it sit there for 20 years. After 20 years you would still just have two pieces of paper sitting on your desk.

The difference in value would come from how well they were marketed. If there were millions of stockbrokers selling baseball cards, if there were financial television channels dedicated to covering the value of baseball cards with a ticker of baseball card prices streaming at the bottom, if the fund industry spent billions to tell you to buy and hold baseball cards, I am willing to bet we would talk about the fundamentals of baseball cards instead of stocks.

I know that sounds crazy, but the stock market has gone from a place where investors actually own part of a company and have a say in their management, to a market designed to enrich insiders by allowing them to sell shares they buy cheaply through options. Companies continuously issue new shares to their managers without asking their existing shareholders. Those managers then leak that stock to the market a little at a time. It’s unlimited dilution of existing shareholders’ stakes, death by a thousand dilutive cuts. If that isn’t a scam, I don’t know what is. Individual shareholders have nothing but the chance to sell it to the next sucker. A mutual fund buys one million shares of a company with your and your coworkers’ money. You own 1 percent of the company. Six weeks later you own less, and all that money went to insiders, not to the company. And no one asked your permission, and you didn’t know you got diluted or by how much till 90 days after the fact if that soon.

When Broadcast.com went public, we raised a lot of money that certainly helped us grow as a company. But once you get past the raising capital part of the market, the stock market becomes not only inefficient, but as close to a Ponzi scheme as you can get.

As a public company, we got calls every day from people who owned Broadcast.com stock or had bought it for their funds. They didn’t call because they were confused during our road show, were too embarrassed to ask questions and wanted to get more information. They called because they wanted to know if the “fundamentals” – the marketing points – they had heard before were improving. And the most important fundamental was “The Number,” our quarterly earnings (or in our case, a loss). Once we went public, Morgan Stanley published a report on our company, as did several other firms. They all projected our quarterly sales and earnings. Would we beat The Number?

Of course, by law, we were not allowed to say anything. That didn’t stop people from asking. They needed us to beat the forecast. They knew if we beat The Number the volume on the stock would go up. Brokers would tell their clients about it. The Wall Street Journal would write about it. CNBC would shout the good news to day traders and investment banks that watched their network all day long. All the volume would drive up the stock price.

Unfortunately, patience is not a virtue on Wall Street. Every day, portfolios are valued by at closing price. If the value of your fund isn’t keeping up with the indexes or your competition, the new money coming in the market won’t come to you. It just wasn’t feasible for these investors to wait till the number was reported by companies each quarter. The volume had to be on the stocks in you fund. To keep the volume about a stock up, and the demand for the stock increasing, you needed to have good news to tell.

Volume, The Number, whisper numbers, insiders granting themselves millions and millions of options – these are the games that Wall Street plays to keep on enriching themselves at the expense of the public. I know this. I have tried to tell people to be careful before they turned over their life savings and their financial future to someone whose first job is to keep their job, not make you money.

Till I read The Number by Alex Berenson, I never had a book that explained how the market truly worked that I could tell my friends, family and acquaintances to read. I never had a book that would truly warn them that the market was not as fair and honest as mutual fund and brokerage commercials made them out to be. I may be a cynic when it comes to the stock market, but I am an informed cynic, and that has helped me make some very, very profitable decisions in the market.

If you are considering investing in the market, any part of it, or if you are considering giving your hard earned money over to someone else to manage, please, please read The Number first.

Annotated Letter

I get asked all the time to write a book about business and my approach to it. I’m not ready to take that leap yet, but along the way, when I find a book that really impresses me, I try to help it find an audience.

• Even if you aren’t ready to share your own thinking, if you find thinking that mirrors yours, try and amplify it — that way, you can share your thinking/direct people to a source to learn more about your thinking

In this case, it wasn’t long ago I read my now favorite book about the stock market called The Number by Alex Berenson. I liked it so much, I volunteered to write the forward for the paperback edition which comes out this week.

• Instead of writing an entire book himself, Mark is able to give readers a peak into his mind and amplify another writer’s voice without having to worry about the time and effort needed to write an entire book.

Here is the foreword I wrote for The Number. I recommend that anyone with an interest in the market jump at the chance to buy it.

• General interest book — not “an expert” one. Anybody can learn from it, regardless of their experience

In 1990, I sold my company, MicroSolutions which specialized in what at the time was the relatively new business of helping companies network their computer equipment to CompuServe. After taxes, I walked away with about $2 million. That was going to be my nest egg, and my goal was to protect it at all costs, and grow it wisely.

• Seems like he was more focused on downside protection at first

I set about interviewing stockbrokers and settled upon a broker from Goldman Sachs, Raleigh Ralls. Raleigh was in his late 20s, and relatively new to Goldman. But we hit it off very well and I trusted him. As we planned my financial future, I made it clear that I wanted my nest egg to be invested not like I was 30 years old, but as if I were 60 years old. I was a widows and orphans investor.

• Interesting — *good* entrepreneurs tend to have longer-frame mindsets and higher tolerances to risk. To me this seems as though Mark thinks he is ready to retire at this point.

Over the next year I stuck to my plan. I trusted Raleigh, and he put me in bonds, dividend-paying utilities and blue chips, just as I asked.

• It really was the classic 60 year old portfolio — bonds, dividends-paying utilities, and blue chips.

During that year, Raleigh began asking me a lot of questions about technology. Because of my experience at MicroSolutions, I knew the products and companies that were hot. Synoptics, Wellfleet, NetWorth, Lotus, Novell and others. I knew which had products that worked, didn’t work, were selling or not. How these companies were marketed, and whether or not they were or would be successful.

• Invest in what you know

• Industry experience is very valuable — don’t let anybody tell you that it’s useless (you don’t need it, but it certainly helps far more than it hurts — for the most part)

• If you run a business — you have to know the space like the back of your hand. Who are your competitors, what’s your competitive advantage, what’s the right sales/marketing/distribution?

I couldn’t believe that I would have an advantage in the market. After all, I had read A Random Walk Down Wall Street in college. I truly thought that the markets were efficient, that any available knowledge about a company was already reflected in its stock price. Yet I saw Raleigh using the information I gave him to make money for his clients. He finally broke me down to start using this information to my advantage to make some money in the market. Finally after more than a year, I relented. I was ready to trade.

• lol — markets are DEFINITELY not efficient

  • Be careful of what you read and don’t take anything for Gospel. Read as much as you can (Charlie Munger is known as a book on legs), but take everything with a grain of salt and form your own opinions. If you want some help getting started, check out my bookshelves

• If you have a competitive advantage — take it

Notice I didn’t use the word invest. I wasn’t an investor. I just wanted to make money. The reason I was ready to try was that it was patently obvious that the market wasn’t efficient. Someone like me with industry knowledge had an advantage. My knowledge could be used profitably. As we got ready to start, I asked Raleigh if he had any words of wisdom that I should remember. His response was simple. “Get Long, Get Loud”.

• Know the difference between investing and speculating

• That’s… an interesting mantra. Does it mean to invest in the future and market your investments? Let’s see…

Get Long, Get Loud. As we started buying and selling technology stocks, most of which were in the local area networking field that I had specialized in at MicroSolutions, Raleigh put me on the phone with analysts, money managers, individual investors, reporters, anyone with money or influence who wanted to talk technology and stocks.

• Start with what you know

• Talk to as many people as you can to form a worldview

We talked about token ring topologies that didn’t work on 10BaseT. We talked about what companies were stuffing channels – selling more equipment to their distributors than the distributors really needed to meet the retail demand. We talked about who was winning, and who was losing. We talked about things that really amounted to the things you would hear if you attended any industry trade show panel. Yet after hanging up the phone with these people, I would watch stocks move up and down. Of course as the stocks moved, the number of people wanting to talk to me grew.

• Understand the underlying technology

• Understand the business models and distribution channels

• Understand what moves the stocks

  • Stan Druckenmiller:
    “I focused my analysis on seeking to identify the factors that were strongly correlated to a stock’s price movement as opposed to looking at all the fundamentals. Frankly, even today, many analysts still don’t know what makes their particular stocks go up and down.”

    • If you know what *actually* moves stock prices, there will be a long line of people waiting to speak with you.

I remember buying stock in a Canadian company called Gandalf Technologies in the early 90s. Gandalf made Ethernet bridges that allowed businesses and homes to connect to the Internet and each other via high-speed digital phone lines called ISDN.

• Case study time!!

I had bought one for my house and liked the product, and I’d talked to other people who’d used it. They had decent results, nothing spectacular, but good enough. I had no idea Gandalf was even a public company until a friend of Raleigh’s asked me about it. What did I think about Gandalf Technologies? It was trading at the time at about a buck a share. It was a decent company, I said. It had competition, but the market was new and they had as much chance as anyone to succeed. Sure, I’ll buy some, and I would be happy to answer any questions about the technology. The market size, the competition, the growth rates. Whatever I knew, I would tell.

• Use the product yourself — every time I see a Substack “Thinkpiece” on a company where it’s clear that the author has never used a product or s/he admits s/he has never used the product, run away.

• Don’t just be a customer — talk to other customers

• New markets are anybody’s game — Sequoia China plays this game better than anyone. They’ll invest in the top 3-5 companies in a space, and as long as one breaks through — they will make money. Usually 2-3 of their portfolio end up becoming 2 of the top 3 companies in the space.

• The classic investing criteria: Market Size, Competition, Growth Rates. It doesn’t matter what stage you’re investing that — these are fundamental to any business.

• Talk to people — build up a reputation and learn.

I bought the stock, I answered the questions, and I watched Gandalf climb from a dollar to about $20 a share over the next months.

• !!!

At a dollar, I could make an argument that Gandalf could be attractive. Its market was growing, and compared to the competition, it was reasonably valued on a price-sales or price-earnings basis. But at $20, the company’s market value was close to $1 billion – which in those days was real money. The situation was crazy. People were buying the stock because other people were buying the stock.

• Valuation matters — both absolute and relative

• Herd mentality is real

• Be intellectually honest

To add to the volume, a mid-sized investment bank that specialized in technology companies came out with a buy rating on Gandalf. They reiterated all the marketing mishmash that was fun to talk about when the stock was a dollar. The ISDN market was exploding. The product was good. Gandalf was adding distributors. If they only maintained X percentage of the market, they would grow to some big number. Their competitors were trading at huge market caps, so this company looks cheap. Et cetera, et cetera.

• Lol — don’t you just love the sell-side? Always ready to jump in and help a company out.

• What makes a stock attractive at $1 does not make it attractive at $20.

• “If they only maintain X percent” is the VCs “If we get X percent of the market…”

• The sell-side is more sales than advice

The bank made up forecasts formulating revenue numbers at monstrous growth rates that at some point in the future led to profits. Unfortunately, the bank couldn’t attract enough new money to the stock to sustain its price. It didn’t have enough brokers to shout out the marketing spiel to entice enough new buyers to pay the old buyers. The hope among the “sophisticated buyers” was that one bank picking up coverage would lead to others doing the same. It didn’t happen. No other big investment banks published reports on the stock. The volume turned down.

• MSU + Garbage In Garbage Out (Those who read yesterday’s letter know what I’m talking about).

• It’s all about volume — volume moves the market

So I did the only smart thing. I sold my stock, and I shorted it to boot. Then I told the same people who asked me why I was buying the stock that I had shorted the stock. Over the next months, the stock sank into oblivion. In 1997, Gandalf filed for bankruptcy. Its shares were canceled – wiped out – a few months later. I wish I could take credit for the stock going up, and going down. I can’t. If the company had performed well, who knows what the stock would have done?

• In the long run — the market will correct itself

But the entire experience taught me quite a bit about how the market works. For years on end a company’s price can have less to do with a company’s real prospects than with the excitement it and its supporters are able to generate among investors. That lesson was reinforced as I saw the Gandalf experience repeated with many different stocks over the next 10 years. Brokers and bankers market and sell stocks. Unless demand can be manufactured, the stock will decline.

• Demand moves the market — or as Stan Druckenmiler says (in an answer to “what moves the markets”), it’s liquidity that moves the market

• “The market can be irrational longer than you can be solvent”

• “Price is what you pay, value is what you get”

In July of 1998, my partner Todd Wagner and I took our company, Broadcast.com, public with Morgan Stanley. Broadcast.com used audio and video streaming to enable companies to communicate live with customers, employees, vendors, anyone with a PC. We founded Broadcast.com in 1995, and we were well on our way to being profitable. Still, we never thought we would go public so quickly. But this was the Internet Era, and the demand for Internet stocks was starting to explode. So publicly traded we would become and Morgan Stanley would shepherd us.

• Went public in 3 years — that’s quite unheard of these days

Part of the process of taking a new company public is something called a road show. The road show is just that. A company getting ready to sell shares visits the big mutual funds, hedge funds, pension funds – anyone who can buy millions of dollars of stock in a single order. It’s a sales tour. 7 days, 63 presentations. We often discussed turning up the volume on the stock. It was the ultimate “Get Loud.” Call it Stockapalooza.

• ahahahhahahahahahahahhahahahahahhahahahaha

Prior to the road show, we put together an amazing presentation. We hired consultants to help us. We practiced and practiced. We argued about what we should and shouldn’t say. We had Morgan Stanley and others ask us every possible question they could think of so we wouldn’t look stupid when we sat in front of these savvy investors.

• There’s an aura around Wall Street — people think, “Oh, they’re so much smarter than us — we have to be prepared for EVERYTHING” (spoiler alert — you don’t (even though you really should be))

Savvy investors? I was shocked. Of the 63 companies and 400-plus participants we visited, I would be exaggerating if I said we got 10 good questions about our business and how it worked. The vast majority of people in the meetings had no clue who we were or what we did. They just knew that there were a lot of people talking about the company and they should be there.

• The Roadshow is mostly a sham — purely a relationship business

The lack of knowledge at the meetings got to be such a joke between Todd and I that we used to purposely mess up to see if anyone noticed. Or we would have pet lines that we would make up to crack each other up. Did we ruin our chance for the IPO? Was our product so complicated that no one got it and as a result no one bought the stock? Hell no. They might not have had a clue, but that didn’t stop them from buying the stock. We batted 1.000. Every single investor we talked to placed the maximum order allowable for the stock.

• ahahahahhahahahahahahahahhahahahahahhahahahahahaha

• Reminds me of the old “Meow Game” — if you don’t know what this is, please watch the video. I promise you’ll be entertained

On July 18, 1998, Broadcast.com went public as BCST, priced at 18 dollars a share. It closed at $62.75, a gain of almost 250 percent, which at the time was the largest one day rise of a new offering in the history of the stock market. The same mutual fund managers who were completely clueless about our company placed multimillion orders for our stock. Multimillion dollar orders using YOUR MONEY.

• Wow. 250%. That’s a lot of money that was left on the table

If the value of a stock is what people will pay for it, then Broadcast.com was fairly valued. We were able to work with Morgan Stanley to create volume around the stock. Volume creates demand. Stocks don’t go up because companies do well or do poorly. Stocks go up and down depending on supply and demand. If a stock is marketed well enough to create more demand from buyers than there are sellers, the stock will go up. What about fundamentals? Fundamentals is a word invented by sellers to find buyers.

• Volume creates demand

• THANK YOU — stocks go up and down depending on supply and demand. It seems many people don’t understand this. Is this like a Pittsburgh thing? Seems the only real people who preach this are Mark, Stan Druckenmiller, and David Tepper. #Pittsburgh

Price-earnings ratios, price-sales, the present value of future cash flows, pick one. Fundamentals are merely metrics created to help stockbrokers sell stocks, and to give buyers reassurance when buying stocks. Even how profits are calculated is manipulated to give confidence to buyers.

• In the short term yes — but over the long term I still believe the market is a weighing machine. Sure companies can get away with fraud for a long time, but eventually the truth comes out and these companies (and their investors) will be screwed

• Even if it’s supply and demand that moves the markets, and markets are definitely not efficient, they are still somewhat efficient. Eventually someone will figure it out. The top funds have some really smart people, and with enough capital and conviction, they can move the market.

  • Perfect example — the current stock market’s run up was not in fact caused by the “Robinhood Traders” but by Softbank

I get asked every day to invest in private companies. I always ask the same couple questions. How soon till I get my money back, and how much cash can I make from the investment? I never ask what the PE ratio will be, what the Price to Sales ratio will be. Most private investors are the same way. Heck, in Junior Achievement we were taught to return money to our investors. For some reason, as Alex points out in The Number, buyers of stocks have lost sight of the value of companies paying them cash for their investment. In today’s markets, cash isn’t earned by holding a company and collecting dividends. It’s earned by convincing someone to buy your stock from you.

• Key Questions Mark asks himself:

  • When will I break even?

  • What’s my upside potential?

• Remember the basics — he even gives a shout out to Junior Achievement. Anyone can swing a golf club, but some do it better than others. We all know the basic principles of investing — but actually analyzing the businesses and being disciplined is extremely difficult.

• Sounds eerily similar to VCs today… friends writing up each other’s portfolio companies and lots of paper gains

If you really think of it, when a stock doesn’t pay dividends, there really isn’t a whole lot of difference between a share of stock and a baseball card.

• lol — the exact opposite of what Ben Graham preaches. Stocks are portions of businesses, not paper that’s traded around. There’s a reason Graham is seen as insightful and the godfather of value investing — although this may “seem” obvious, most people ignore it. If the majority of people believe something, does that make it right? In the short term, yes it does. In the long term? Definitely not.

If you put your Mickey Mantle rookie card on your desk, and a share of your favorite non-dividend paying stock next to it, and let it sit there for 20 years. After 20 years you would still just have two pieces of paper sitting on your desk.

• lol

• Look for appreciating assets

The difference in value would come from how well they were marketed. If there were millions of stockbrokers selling baseball cards, if there were financial television channels dedicated to covering the value of baseball cards with a ticker of baseball card prices streaming at the bottom, if the fund industry spent billions to tell you to buy and hold baseball cards, I am willing to bet we would talk about the fundamentals of baseball cards instead of stocks.

• Given the rise in popularity of collectibles — I would not at all be surprised if this existed. In fact — some do exist (in the form of Pawn Stars, Antiques Roadshow PBS, etc)

• The fundamentals of baseball cards sounds silly — but is it really? Think about it and let me know in the comments below.

I know that sounds crazy, but the stock market has gone from a place where investors actually own part of a company and have a say in their management, to a market designed to enrich insiders by allowing them to sell shares they buy cheaply through options. Companies continuously issue new shares to their managers without asking their existing shareholders. Those managers then leak that stock to the market a little at a time. It’s unlimited dilution of existing shareholders’ stakes, death by a thousand dilutive cuts. If that isn’t a scam, I don’t know what is. Individual shareholders have nothing but the chance to sell it to the next sucker. A mutual fund buys one million shares of a company with your and your coworkers’ money. You own 1 percent of the company. Six weeks later you own less, and all that money went to insiders, not to the company. And no one asked your permission, and you didn’t know you got diluted or by how much till 90 days after the fact if that soon.

• “Death by a thousand dilutive cuts” — what a sentence

• Part of the reason people say IPOs are broken — money goes to insiders (often VCs) rather than the company

When Broadcast.com went public, we raised a lot of money that certainly helped us grow as a company. But once you get past the raising capital part of the market, the stock market becomes not only inefficient, but as close to a Ponzi scheme as you can get.

• The Stock Market is a ponzi scheme — not exactly, but the way people are using it today, it’s definitely not 100% false

As a public company, we got calls every day from people who owned Broadcast.com stock or had bought it for their funds. They didn’t call because they were confused during our road show, were too embarrassed to ask questions and wanted to get more information. They called because they wanted to know if the “fundamentals” – the marketing points – they had heard before were improving. And the most important fundamental was “The Number,” our quarterly earnings (or in our case, a loss). Once we went public, Morgan Stanley published a report on our company, as did several other firms. They all projected our quarterly sales and earnings. Would we beat The Number?

• Fundamentals should not equal marketing points. Everyone claims they care about the fundamentals, but they really don’t

Of course, by law, we were not allowed to say anything. That didn’t stop people from asking. They needed us to beat the forecast. They knew if we beat The Number the volume on the stock would go up. Brokers would tell their clients about it. The Wall Street Journal would write about it. CNBC would shout the good news to day traders and investment banks that watched their network all day long. All the volume would drive up the stock price.

• Liquidity moves the market

  

Unfortunately, patience is not a virtue on Wall Street. Every day, portfolios are valued by at closing price. If the value of your fund isn’t keeping up with the indexes or your competition, the new money coming in the market won’t come to you. It just wasn’t feasible for these investors to wait till the number was reported by companies each quarter. The volume had to be on the stocks in you fund. To keep the volume about a stock up, and the demand for the stock increasing, you needed to have good news to tell.

• Be patient — but it’s hard when portfolio are evaluated daily based on their closing price. That’s what makes Berkshire legendary — cheap, locked up access to capital.

Volume, The Number, whisper numbers, insiders granting themselves millions and millions of options – these are the games that Wall Street plays to keep on enriching themselves at the expense of the public. I know this. I have tried to tell people to be careful before they turned over their life savings and their financial future to someone whose first job is to keep their job, not make you money.

• This is why Skin in the Game is so important. If you advisor cares more about keeping his job than making you money, s/he’s probably not going to be giving you great advice.

Till I read The Number by Alex Berenson, I never had a book that explained how the market truly worked that I could tell my friends, family and acquaintances to read. I never had a book that would truly warn them that the market was not as fair and honest as mutual fund and brokerage commercials made them out to be. I may be a cynic when it comes to the stock market, but I am an informed cynic, and that has helped me make some very, very profitable decisions in the market.

• Most of the cynics I meet are more informed and well-educated than the average person. But this doesn’t mean they’re always right. Take short-sellers for example. The good short-sellers (ie Carson Block, Jim Chanos) do deep, deep research — who are examples of short sellers who completely blew up and were proven wrong in the long term?

• Being a cynic can make you a lot of money “very quickly” but during 10-year bull markets (like the one we’re in), things can be very painful if you can’t “read the room”

If you are considering investing in the market, any part of it, or if you are considering giving your hard earned money over to someone else to manage, please, please read The Number first.

• Before you start making financial decisions, please educate yourself

Wrap-up

If you’ve got any thoughts, questions, or feedback, please drop me a line - I would love to chat! You can find me on twitter at @kevg1412 or my email at kevin@12mv2.com.

Please DM or email me any time — to share non-obvious intel, views and correct or solicit mine. I appreciate your continued support and partnership :D.

All compilations here.

All bookshelves here.

Support

As many of you know, making compilations and this newsletter is a (very time consuming) passion project for me. Multiple people have reached out about how they can support me so that I continue, so I set up with a few ways:

• 1) Patreon

• 2) Bitcoin: 3NMAiprwVj5513FSqHUNycor6itT55atpo

Thank you!