Sean Peche critiques Michael Saylor’s Bitcoin-fueled strategy for MicroStrategy, calling it a bold stretch of reality. Saylor’s claims, like “making $500m a day” and urging companies like Microsoft to adopt Bitcoin for trillions in profits, raise serious questions for Peche. He likens this to Warren Buffett’s warning about complex financial models and advises skepticism. In Peche’s view, MicroStrategy’s $86bn leveraged approach may not be as promising as Saylor suggests.

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This content is supplied by Sean Peche, Portfolio Manager at Ranmore Fund Management Ltd.

First appeared on LinkedIn

Imagine I’m a sales guy, and I call to tell you about our hedge fund which:

  • Has only one position
  • Uses leverage, there’s no limit, and it’s growing
  • Is run by a “fund manager” with a chequered history – settling with the regulator back in 2000 because he inaccurately reported profits instead of losses…
  • Priced at 200% premium to Nav (down from 300%).

Are you keen?

Every sensible investor would surely hang up.

But I’m not talking about a “fund”.

I’m talking about MicroStrategy.

In a clip last week, their CEO, Michael Saylor, said:

“We’re making $500m a day, we might be the most profitable company on the planet”.

Making?

Now it’s one thing for companies to talk about “making” money in the present tense if they generate annuity income but to use the word, “making” when annualising unrealised gains on a couple of recent deals is surely stretching it.

How did he calculate “making” $500m a day?

“If you want to understand the economics of this, we generate a spread, the Bitcoin spread, which is a function of the equity premium, the convert premium, and the Bitcoin premium”.

Two weeks ago we did a $4.6bn of an ATM. We ran about a 70% spread. That means we ran a $3bn BTC gain in 5 days. That’s $12.5 per share, BUT over 10 years, that’s $36bn.

This week we did a convertible bond, $3bn at an 80% BTC spread. That’s a $2.4bn gain, about $10 a share, BUT over 10 years, that’s $125 a share”.

Nothing like taking a $3bn “gain” and annualising it into a $36bn gain over 10 years … using a new fancy formula called a “Bitcoin spread”.

But eager to “convert” others over to his formulae and spreadsheets, Saylor said:

“If Microsoft stopped dividending out their cash flow and stopped buying back their stock and converted to a Bitcoin buy and you crank in, like a conservative, 21% assumption, half their cash flow in bitcoin, you make $1trn over 10 years. You put all your cash into Bitcoin, you make $2trn -$4trn for shareholders. If Berkshire did that and put $325bn into Bitcoin, they’re generating $60bn a year of investment income.”

Is 21% returns p/a over 10 years “conservative”?

Not on my spreadsheets.

Anyway, Microsoft wasn’t convinced.

And they code spreadsheets.

I also don’t fancy his chances at Berkshire because, after the GFC, Warren Buffett said in his Annual Letter to Shareholders:

“Investors should be sceptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions BEHIND the models. Beware of geeks bearing formulas”.

We agree.

And steer clear of CEOs who stretch the truth like this and then believe it with leverage.

And pity the holders of the Nasdaq 100 because they’re about to start owning this $86bn leveraged “fund”.

Which has been down 14% in the past 5 days.

I suspect Saylor won’t be annualising that.

Disclosure:

  • Ranmore Global Equity Fund holds 0% of the companies mentioned.
  • The content of this marketing material is provided for information purposes only and is not advice.
  • Past performance is no guarantee of future performance.

Disclaimer:

  • Ranmore Global Equity Fund plc is approved for marketing and distribution in South Africa in terms of section 65 of the Collective Investment Schemes Control Act (2002). Collective Investment Schemes (CIS) are generally medium—to long-term investments. The value of shares in the Fund may go down and up, and past performance is not necessarily an indication of future performance or returns.

Read also:

  • 🔒 MicroStrategy’s Bitcoin bet: Infinite money glitch or risky gamble? – Lionel Laurent
  • 🔒 FT: MicroStrategy takes fundraising to $7bn for push into bitcoin
  • 🔒 The Economist: Bitcoin’s 138% surge in ’24 is a nonsense-free rally