April 19, 2021 – On today’s podcast, we welcome special guest SpacGuru, a widely followed pseudonymous Twitter account. SpacGuru is a Wall Street veteran and an expert on the SPAC market.
On the podcast, SpacGuru discusses:
- His career background and why he wants to help out individual investors
- What the overly negative media gets wrong about SPACs
- Why SPACs are better than IPOs
- The best strategies to invest in SPACs
- Pitfalls and mistakes that investors should stay away from
- And more
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Transcript:
Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.Accelerateshares.com.
Julian Klymochko: And we’re live with the SpacGuru himself. We’re going to refer to him as G today. G, how are you? Thanks for coming on The Absolute Return Podcast.
G: Hey Julian. Thanks for having me. It’s great seeing you on CNBC. I liked that we have a little representation now.
Julian Klymochko: Yeah, that’s great. And actually, asked to me on to come on again, which is why I’m wearing the tie here. So that’ll be on in a few hours, but by the time we publish this, it’ll be long in the past, but nonetheless, super excited to have you on the show today to talk about SPAC, Special Purpose Acquisition Companies, blank checks and all that good stuff. And so, I invited G on the show, really it stemmed from a recent discussion on Clubhouse with the Forest Road Acquisition team, sponsored team and Andrew Ross Sorkin, who is a CNBC journalists’ contributor. And Andrew Ross Sorkin has had a negative bias towards SPACs. Everyone knows that he complains that post-SPAC equities do poorly, retail gets ripped off their bag holders, et cetera, et cetera. And G came on and really countered that. And I found that it was a refreshing voice to have in the market to preach the benefits of SPACs with any asset class.
There’s obviously positives and negatives. And I found it really stunning to see certain journalists super negative on say SPACs for example, but then be all rah-ah on IPO’s which retail investors do not have a good experience with at all, but I digress. G I want to welcome you to the show and really give you a platform to have your voice heard with respect to the SPAC market and the positives that you’re seeing and your thoughts on the market. Can you follow it closely? But prior to getting into that, for those unaware of what this SpacGuru is all about, you want to give a quick background and keep in mind for the listeners is, that you are anonymous or pseudonymous account on Twitter with a large following, and we’ll go from there.
G: Sure. Hey, thanks. So just to give everybody a quick background. I started on Wall Street in the early nineties. There’s a lot of people that I knew. It was a much different time on Wall Street. You could walk into the New York stock exchange. There were not armed guards there with machine guns, the roads weren’t blocked. We played stick ball in front of the New York stock exchange. And after the close, there would even be times when you could walk in with a beer in your hand and see some of your friends and nobody really cared. So, I started back then. There’s a lot of people who I know that are either sponsors or investment bankers or pipe people, you name it. Because I was actually there at some point early on in my career. I’ve later gone on to do some SPACs myself. I shouldn’t say that. I did a lot of mergers and acquisitions. I’ve never actually did a SPAC. But I did SPAC like product and I was very close with a lot of the GKN guys early on, which if you know your SPAC history, those are the fellows, the three guys over at GKN. Guys who basically put this whole thing together. They’re better known now. Some of them is early bird capital and because I know SPAC sponsors, pipe investors, some of the targets and because I was also the President and CEO of public and private companies and I ran a fund for a while. So, it’s just easiest for me to stay anonymous. And it’s not for any other reason. I’ve never had any problems, no sanctions or fines from the SEC. So, it’s nothing nefarious like that. It’s just a lot easier, and I like my anonymity. I do this for free. I do it to be kind and help because when I started out, people were kind and helped me. So, with that as my background, now we can go on to some of our [Inaudible 00:04:22].
Julian Klymochko: Yeah, definitely super excited to get into it. And specifically, I wanted to start out. What you’re discussing with Andrew Ross Sorkin. So, his viewpoint, and we see this many in the media. And one thing that I wanted to straighten out is, you know, SPACs have really come onto the scene since last summer, is really when the boom started and front-page news every day for eight, nine months already. And top of mind for the media investors, et cetera, like SPACs are this massive, massive thing. And there was a huge boom. They went from, you know, last year, 20 billion, a backwater asset class that you talk about a SPAC, no one had any idea what the heck you’re talking about. Now, everyone knows they’ve gone up 10X year over year in terms of aggregate market capitalization now above 200 billion. However, that still pales in comparison to the private equity, which is like North of 3 trillion in the global private equity industry to hedge funds. Global hedge funds, I believe are at 2.5 trillion and venture capital is, I believe, you know, perhaps around a trillion, but nonetheless, the SoftBank Vision Fund itself is $100 billion dollar, half the entire SPAC market. Now, you know, there’s 552, SPACs outstanding, the average size, roughly 300 million. So yes, there is a lot. However, you got to remember, these are micro companies and if we aggregate them all. Like say they control roughly 175 billion in trust or so, 180 billion, they typically do the average deal three to five X trust value. So, in aggregate call that, you know, 6 to $700 million deal value. If every single one of them gets the deal done and that aggregate deal value. If you think about it on a fair comparison, that equals one Tesla, one Tesla market cap. So just to give you a sense of the size of how it’s sort of overblown in terms of frenzied activity, I think it was just an asset class in bloom, but onto the negative bias within the media that was discussed on this recent Clubhouse episode specifically, Andrew Ross Sorkin was very negative on the asset class. He said specifically that retail investors were getting ripped off. What are your thoughts on that G?
G: Well, anybody who watches CNBC and especially in the morning, you could see Andrew Ross Sorkin and David Faber and Jim Cramer talk about SPACs, like they’re the Ponzi scheme of 2021 and it aggravates the heck out of me. And one of the things is Jim Cramer will talk trash about SPACs in the morning, but if one of these SPAC goes on mad money in the evening, he’ll kiss their ass in Macy’s window. He is a bipolar, you know, he’s there for entertainment. Please don’t listen to any of his advice, anyone. And if you don’t believe me, go look up his returns in his charitable trust versus the S&P, he underperforms. So anyhow, with saying that, we were on clubhouse and I’ll address later, why I’m on clubhouse, but we were on clubhouse and we were on with the Forest Road sponsors, symbol FRX, who was doing Beachbody.
And they were nice enough to have Julian and I on it. And when I saw that Andrew Sorkin was on, they said, ah, here we go. I’m going to be nice and I’m not disrespectful. And I don’t speak over people and I don’t curse and raise my voice. But I said to him, I said, hey Andrew, you know, you’re really hard on SPAC. And he went on to say that SPACs historically underperformed, and it historically terrible for retail investors and all the negative things that we know, such as there’s 500 of them out there. And there’s, you know, your fun, unsustainable and that type of thing. Well, that’s fine, and I do agree there’s a lot. And I do agree with Julian said, one Tesla is more than all of them combined on their best day. Well, with that being said, it’s not bad for retail in my opinion.
And this is what I told them. I said on CNBC, a company can do an IPO and whatever that company is, whether it’s Jordache, Airbnb, a Affirm, you name it. And it’s priced, I’ll make up a hypothetical. And IPO is priced at $25 dollars. They open it at $60, it’s $60. So that’s the first print. So, any retail investor who wants to own any of these new hot IPOs is already buying and over 100% percent gain from a fund or an institution that owned the stock literally for a half a day. And what happens is, these retail folks will go in and they’ll buy this IPO, up at $60. And a lot of times we’ll watch it trade flat or we’ll watch a trade down. And for the retail investor, they’re not getting any of this allocation.
Julian Klymochko: Right.
G: At the IPO price. They’re buying it in the secondary market and they do travel.
And if you are sitting in front of a [Inaudible 00:10:08], you can look at any of them. But the thing that makes me aggravated is that CNBC will go on and they will bang the drum of what a successful IPO it was. And we just had one not too long ago, I’m forgetting which one it was. But the first tick was $70 dollars, and it traded nothing but down from $70, and it closed at $60, there was not an uptick for the whole day. And they said, what a great success it was. Well, anybody who’s a retail investor or a trader. It was a miserable failure because it only went down regardless of where you bought it. So, for them to say something is a tremendous success because they got the IPO off. Well, it was a failure in many places, one of the failures, it was a failure to the company that went public because they didn’t price it right.
Julian Klymochko: Right.
G: You know, if you’re going to price something at $25 dollars and it opens at $60, if I was the target company, if I was the company doing my IPO, that’s horrible. And I’ll give you another example. One of the stocks was a loanDepot and I kind of like loanDepot as a company. And it was a lot of selling shareholders and founders in the IPO. And they opened it at the low end of the range. The range was 1$3 to say, who knows $13 to $18 dollars. Well, they opened it a $13, well go look at the chart on that. They opened this thing up in the twenties.
Julian Klymochko: Twenty-two bucks.
G: Now, if you’re a founder you started a company from scratch. That’s really harsh. They take you out of the $13 and it opens, you know, 15% percent.
Julian Klymochko: Well, they’re basically selling shares way too cheap and suffering undue dilution to the business.
G: Exactly. But Goldman Sachs and everybody who was on the book, they got their piece, they got their investment banking fee. They got their overallotment. They got their underwriters warrants. And yeah, it was a successful IPO. The company did raise some money. Goldman Sachs and all the bankers, they got all of their fees, which I’m not saying they’re not entitled to, you know, your work. You’re entitled to make your fees, it’s all disclosed. But there’s such a huge disconnect in the pricing. There’s such a huge disconnect that this was a great deal. It was a great deal for the chosen ones. It was a great deal for the 1% percent, the funds, the institutions, you know, the [Inaudible 00:12:53]. It wasn’t a good deal for, you know, John Doe.
Julian Klymochko: And specifically, you’re mentioning the institutional investor is buying at the IPO $13 dollars, flipping the next day to retail at $22 dollars when it starts trading.
G: Yeah. Yeah. And that’s, who’s buying it from him. Retail is buying it from him.
Julian Klymochko: Yeah.
G: And again, whether that’s fine or that’s not fine, money goes where it’s treated best. And if somebody wants to go and buy that, that’s fine. But when they go on CNBC and when Andrew Ross Sorkin said retail investors are going to get killed. Retail investors get killed all the time.
Julian Klymochko: Yeah.
G: Retail investors have the dumb money. When retail investors are buying, they should be selling. When they’re selling, you should be buying. We know that. And the difference for me with SPACs is, you get to know, it’s almost like a hurricane versus an earthquake. When people have an earthquake and terrible destruction happens, it catches everybody by surprise. You could be laying in bed. You could be walking down the street; you could be in your office. And all of a sudden, the earth starts moving. There’s nothing you could do, but a hurricane, you know its name, you know where it came from, you know when it’s coming, you know about how big it’s going to be. And, and that’s kind of like a SPAC to me. A spec is, I get to know how much money they have to go shopping with. So, I have a ballpark, like you said, Julian, 3 to 5X of their SPAC size. Now we also know that sometimes they use a pipe. So, for me, my number, my back of the envelope quick number is, they could go six times if they really wanted to.
Julian Klymochko: Right.
G: So, I say, okay, well, here we go. And here’s the sponsor group, and this is their pedigree. This is their story. This is what they’ve done. And I say, okay. I like whomever it may be. I like, I like Eric Schmidt. I like Michael Dell. I like KKR. I like Chamath. I like Michael Klein, whoever it is you like or dislike, you can make that decision. And you have plenty of time.
Julian Klymochko: In term of SPAC sponsors.
G: Right, well, you know, before it even comes out and then the unit lists, so then a unit comes out and here’s another thing, you know, in an IPO, you don’t know how many underwriters over allotment shares your buying. You don’t know all of these different things, but in a SPAC, you know, that all the funds and all the institutions and all the guys who are getting to buy all the IPOs at half price before they sell them, you know, they’re buying these units roughly at $10, for the most part, there are the outliers.
Julian Klymochko: Yeah.
G: But you know where the competition is, you know, where the overhang is. Now, I for example, if I like a deal and I like a sponsor group, and that unit comes out, let’s say hypothetically at $10 dollars and 50 cents, let’s just say, I do a quick look. And I’ll just say, it’s a quarter of a warrant. Well, a lot of warrants trade in that one $1.50 to $2 dollar range. So just for mathematical reasons, we’ll just say, we’ll assume that the warrant might be $2 dollars.
Julian Klymochko: Yeah.
G: Well, if you bought a unit at $10 dollars and 50 cents, and it’s got a quarter of a warrant, there’s a good chance you’re going to be able to sell that quarter of a warrant for that 50 cents. And then you have the redemption backstop. So, you’ve basically, we’re able to buy a call option on a sponsored team you like. With a focus you like, with a bank account that you think they could do something decent. And you’re in exactly, not exactly, but you’re in a small premium, small premium it, at $10.50, you’re in a 5% over Blackstone, BlackRock, KKR, whoever it may be. That’s pretty good for a retail investor. Who’s used to buying a hundred percent plus gain from these folks.
And then of course, there’s what Julian does. When it goes below that, you own it for less than they own it. And that takes all your risk away. So, for Julian, for myself, for a lot of the people listening to this, and a lot of the SPAC investors, there’s many, many strategies. Some people sell the warrant. Some people sell the common and keep the warrant for free. You know, there’s lots of ways to do it. So, when I was on with Clubhouse and I was telling Andrew Sorkin, how I felt, he was a gentleman, he listened, he didn’t speak over me. And when I say he listened, he didn’t just sit there quietly. He actually responded. And he told me things about him that I never would’ve thought of.
And one of the things he said that was really interesting was in the financial collapse, him as a reporter, and many of the people at CNBC took an awful lot of heat for not trying to call it a bubble or deflate it or warn people.
Julian Klymochko: Right.
G: So, you know, for him to have a little bit of baggage from that, that’s something that I never thought of. And the old walk a mile in someone else’s shoes was pretty interesting, but on the same token, I think him listening to me about how they cheer about IPO’s and how successful they are, and in the same breath, we’ll say that retail is going to get killed in SPACs. And what I said to him is, is they say SPAC almost like the old gypsy woman in a movie who will put a curse on someone that’s spit on the floor.
It’s when they say SPAC, they say it with such disgust and distain. And they just mock flying cars in the Jetsons. And they say every bad thing they could say, but you never really hear them give it the credit for the ones that people like. When they talk about DraftKings, once in a while, they’ll say it’s a SPAC, but you’d never hear him talk about Utz, Potato Chips, which a lot of people say, Utz, and I did as well, until I heard one of the family members referred to her name as Utz, so, you know, Utz was a SPAC that pays a dividend. So, this isn’t 2026 revenue, but there are a lot of them. And as we saw when EV was hot, it was all EVs. When gaming’s hot, it’s all gaming. When charging is hot, how many chargers came out? I never heard of LiDAR or Velodyne.
Julian Klymochko: Right.
G: And now what is there? Six LiDAR SPACs?
Julian Klymochko: Yeah, half a dozen.
G: So, as we could see, you know, it’s a group mentality, it’s the hot shiny object and retail investors you usually get killed. But the retail investors who get killed in SPAC are not the early adapters. They’re not the ones who were watching the filings and reading, you know, Julian’s tweets about a new deal that price, they’re the ones who were the YOLO, FOMO. Let’s go buy this hot, new deal that’s trading through 20.
Julian Klymochko: Yup.
G: And then they all say they’re bag holders. And it drives me crazy. Because they don’t ever have to hold a bag as they call it.
Michael Kesslering: Yeah, and especially when you mentioned that, I mean, looking at the FOMO or meme investors that buy CCIV at, you know, $40 or $50 dollars, and then see it go back down to 20 and complain about that. That argument doesn’t really carry a lot of weight with me.
Julian Klymochko: Well, from that perspective. I want to mention, like one inherent negative media bias that really aggravates me specifically is say on that example of a SPAC that goes from $60 to $20, they’re like, Oh, it’s, it’s down by 66% percent. It’s just gotten crushed. I’m like, listen, it IPO last summer at $10 dollars. People who bought are up over a hundred percent. So, the key is, you know, at least a balanced view mentioned, hey, this thing went public at $10 dollars, it’s more than doubled. Anyone who was disciplined in their buying, made a ton of money, outperform dramatically. Why don’t you mention that as well? Not just a hundred percent focused on the negative, but Mike, what were you saying?
Michael Kesslering: Oh, I was just going to ask, I’m very curious. We kind of talked about the two alternatives for going public. Being either a SPAC or a traditional IPO process. What’s your view on direct listings in that same conversation?
G: Well, if you’re asking me, you know, that’s a different animal. A direct listing is almost the polar opposite of a SPAC. The targets going into the SPAC, knowing that there’s money and escrow, that they’re going to get their hands on. Most likely to execute their plan. It seems like these direct listings, a lot of them are selling shareholders. We saw that with Palantir.
Julian Klymochko: Yep.
G: The one that comes to mind is the one that just came out, which was, you don’t hear anybody on CNBC, you know, pimping Oscar Healthcare. That was selling shareholders. They brought that out at the high end of the range and it got plumped. So again, when people say, well, these direct listings, that’s going to be the end of SPACs. It’s not going to be the under SPACs. And a SPAC is a different walk than an IPO. You’re doing the spec because [A], you don’t want to take the time and go through the IPO process. A lot of people are taking the SPAC route because they actually want the sponsors to be involved. They want some adult supervision. They want people who are movers and shakers in industries to open doors for them. So, if you’re a company, if you’re a target company and you have a whole bunch of SPAC sponsors, courting you and wanting to do a deal, and they’re all reasonably within the amount of money that you want for evaluation and have enough cash to execute on your plan. I could see you taking less money to go with a sponsor who you believe in.
Julian Klymochko: Right.
G: Would you rather go with Harry Sloan for a little less money, than a sponsor group that it’s their first SPAC. So again, you have to weigh the pros with the cons. And I think the good thing for me and for Julian and for retail investors is that now with so many of these SPACs online, there’s so many different trades and investments you can make, but the better side of the equation is that with so many of them chasing the same targets, you know, the targets had all the leverage.
Julian Klymochko: Yep.
G: So, we will go back and talk about Churchill Capital. Churchill Capital had to make a terrible deal because Lucid had their feet to the fire.
Julian Klymochko: Yeah, and the market forced their hand there. They really had no choice just given how the stock was trading
G: Well, let’s just think of that. And I don’t know, Michael Klein, I never spoke to him. So, this is all speculation, but I try to put myself in his shoes. You’re Michael Klein, and you’re trying to negotiate on behalf of Churchill Capital and the SPAC holders and the shareholders. And every day you watch the stock trade, a hundred million shares, and it’s up dollar, $5-dollar, $10-dollar, $20-dollar, $50-dollar. It makes negotiation incredibly hard when you’re trying to get a good valuation for your team.
Julian Klymochko: And I should note that was the media’s fault because they leak the deal and continued to leak certain details and hype the stock, which got retail investors, really enthusiastic about it. You saw chat rooms, wallstreetbets, you know, the SPAC channel blow up with activity based off these media, these journalists report, and when they’re slagging these deals. But on the other hand, they’re the ones out causing some of these issues.
G: Let me ask you this. During this whole thing, and the negativity during the SPAC, did you that CNBC was showing Lucid commercials in every commercial break? At no point did they say, hey, this SPAC deal is nonsense and retail investors are going to get screwed. We’re going to actually do the right thing. And we’re not going to show the Lucid air car that’s not even ready to be sold yet on our TV, every commercial break.
Julian Klymochko: Right. Right.
G: So again, it’s incredibly biased. It’s polar opposite. You know, do as I say, not as I do. If they really wanted to take the high and mighty road, they could, but they don’t. And you know, they’re a business, they’re an entertainment company, they want eyes. And most people I know are not buying Boeing and Bank of America. So that’s what they’re used to talking about. So, anything new gets fought and anything that’s not the dorm is bad, and it’s not bad. There are bad things, but you know, who was hounding the table more about Enron and WorldCom and Bear Stearns and Lehman Brothers? And, you know, go down the whole list of all these things that just got blown up for big money for more money than the whole SPAC universe was before 2020. But you never hear that.
Julian Klymochko: No, and another common criticism that I wanted to discuss, and this is really come up lately is, you know, one of the tools that companies going public via SPAC utilize are forecasts for guidance, which obviously aren’t allowed within the context of a traditional IPO. However, many of the companies going public via SPAC are earliest stage and even professional investors want to see, you know, some sort of forecast look, where do you see this business heading? What are your goals? What’s your budget? Not to mention basically nearly every public company produces forecasts or have sell side analysts, providing those estimates for investors. And so, what are your thoughts on, like a lot of these SPACs being sold off for guidance and forecasts that many views as too aggressive. For example, over the past couple of weeks, we saw a number of posts SPAC equities focused in the EV sector that revised their forecast, at least in the near term down dramatically. And that’s where a lot of the attention is these days. Obviously, the media tends to not mention the ones that raise guidance, which actually does happen. Whether it’s one like a Playboy, they just raised their guidance pretty significantly and has been a slam dunk of a post-back equity now trading at $20 and change. But I digress G, what are your thoughts on the notion of forecasts and how the market interprets that?
G: Well, I’m a big fan of full disclosure and transparency. So, I like it when we see things like this. I also like to under promise and over perform, but you also have responsibility and obligation, a fiduciary duty to be transparent and share as much as you can with your shareholders and the public as much as possible. And as far as, you know, buy-side and all of these different thing’s kind of converge on SPACs and you know, better than anyone, that’s why we see some of these SPAC’s trading below net asset value. And what a lot of the retail investors don’t realize is, you know, some of these people in their book, their risk department will look at their book and say, okay, great, you own a little bit too many of these, you know, you need to come out of them.
And nobody kind of wraps their head around. Why somebody who paid $10 dollars for something who’s a big fund who has billions of dollars under management would sell a SPAC unit at $9.75. So, I think that the education still needs to improve for retail folks. And as far as what you were saying with the EV companies, and whether we say it’s EV or Lidar or charging or batteries or whatever, it might be, water seeks its own level. And the competition kind of takes a lot of the people’s eye off the ball. So, when Velodyne was the only Lidar play, it was easy. Oh, Lidar, well that’s pretty cool technology. I want to be involved some Lidar and Desktop Metal. They said, Hey, we’re the first pure play 3d printer. Wow. That’s really cool. Well, now how many more do we have?
So, it’s the same thing, whether you’re looking at over 500 SPACs, or if you’re looking at first to market, or then you’re looking at copycat sponsors, it’s almost like what happened with GameStop. If the wallstreetbets guys would’ve just stayed focused on the GameStop, they probably could’ve got it two thousand and put all their rocket emojis and ate their attendees and believed in all those things. But then they started saying, well, we’re going into AMC and we’re going into Express, and we’re going into naked brands. And, you know, just go on and on. We’re going to corner the market and silver it. You not know how the Silver ETFs work? You’re not, there is no short squeeze in Silver, you’re buying the suits holdings. So again, it’s a cyclical process. We always have to adapt. What worked yesterday does not work today. You know, SPACs are six months with easiest game in town.
Julian Klymochko: Yeah.
G: You buy on the news, you take the SPAC bop, you know, rinse and repeat. And it was incredibly easy. Look at stocks like the HOL. That news came out, it spiked, it went what? Over $20 dollars a share. And there’s lots of stories like that. And I remember when STIC, BarkBox announced.
Julian Klymochko: Yep.
G: The day of the announcement, pre-market it, what a trade? $14, $15, $16 dollars, something like that, it’s $11 dollars now. You don’t have to rush out, right.
Julian Klymochko: That was the norm.
G: So, you don’t have to rush out.
Julian Klymochko: Right.
G: That was the norm.
Julian Klymochko: Yeah.
G: And the people who held the bags, who are the people who read an announcement, didn’t know what they were buying. We’re buying a 40% percent gain off of people like us. And then they say, Oh, I held the bags. And another thing is, a lot of people who really get hurt are the people who are buying these illiquid investments after hours.
Julian Klymochko: Yep.
G: You can see incredible, incredible moves after hours. And don’t get me wrong. There’s plenty of money to be made. There are people who make money after hours, and that’s all they do, but you can’t be everything. You can’t be a specialist in afterhours trading, SPACs, warrants, units, arbitrage. You kind of have to find your own lane. And that’s what we try to help people do.
Julian Klymochko: For sure. And I want to touch on the warrants because that’s one thing that I’m seeing. That’s highly disconcerting. You have retail investors talking about their portfolios, and it’s stuffed with warrants, which are effectively, highly leveraged bets on already extremely volatile assets. And, you know, there’s not a lot of risk management there, in my opinion, what are your thoughts on retail investors? Are any investors holding outright warrants and speculating in warrants?
G: Well, we have a great thing that we could point to that just happened recently. So, if we all go and look at Romeo Power, symbol, RMO, they met the criteria of their stock trading price. It maintained for the period that they needed to maintain. And the company came out and announced. We are going to be exercising and calling all of our publicly traded warrants. And the stock went into a freefall and the stock traded below the warrants exercise price, and the warrants expired pretty close to worthless. And if you weren’t smart enough to sell them all the way till the end, you were blessed with a penny in your account the next day for every one of them you had.
Now, ironically, right after all the warrants died, the company came out with great news in the stock search. The thing is when people DM me and they say, no, the warrants can’t be called because I’m on my brokerage account. And it’s telling me that my warrant expires this date in 2026. I say, well, yeah, that’s the date that your brokerage account put on the website because that’s the day that the merger happened and that’s the countdown of the life expectancy of your warrant, but your warrant took a different path. Your warrant got called. And when people say, well, what does that mean? If you want a warrant you don’t know [Audio Gap 00:35:55] or it was called or what that even means. Obviously, you shouldn’t own warrants.
Julian Klymochko: Right.
G: And I think a lot of retail investors look at well, heck this thing is $12 dollars. And I could buy the $2 dollar warrant and I could go dollar for dollar with it, like a call. Well, go look at QuantumScape, how many people got their asses kicked on that? They were short the comment, and they were buying the warrant thinking that they had cheap protection, but the warrant, the underlying warrant did not have an open or an active registration.
Julian Klymochko: Right.
G: So, if you were short to common and you along the warrant, that really didn’t help you. And if you look at the divergence between the common price and the warrant price, people are saying, well, the warrant should be $11.50 cents less. And it was incredibly undervalued according to those metrics. But what people didn’t take into account was there’s a lot of risk and there’s no registration. So, you know, you’re going to have to hold this.
Julian Klymochko: Yeah, and by registration, you mean that investors warrant holders weren’t able to exercise the warrants?
G: Correct. So, you think that if you have your warrant and you have your $11.50 cents, you can go to the counter and redeem it for your share. Well, that’s not always the case. Sometimes you get a rain check and they say, well, you can redeem it for your share when there’s an active registration for us to convert those warrants into shares. But unfortunately, under our registration statement, we don’t need to do it at this time.
Julian Klymochko: Right.
G: So again, warrants are very risky. Warrants can go to zero. As we know, if you own a unit or a common and you want to redeem at redemption, you can. So, if you have the unit, you can redeem the common, but the warrant yours to keep, you can sell it. You could hang it on your wall. It could go to zero. And another thing that we see that people just get killed on is if you spend $2 dollars for a warrant and the stocks say $11.50, and then the stock goes below $10, and the warrants goes to under a dollar.
Julian Klymochko: Yeah.
G: Well, now you’re down 50% on your warrant. And now, you know, you’re flipping out. Because you look at your portfolio and people say, well, you know, it’s only a dollar, it’s only $2 dollars. Well, don’t look at it like that. If you just bought $5,000 dollars’ worth of them, you know, it’s not only, you know, a dollar, you bought $5,000 dollar worth and now it’s worth $2,500. So, you know, we know that, some of the sophisticated people know that, or not even sophisticated, but a lot of young people, they don’t know, or people who are new to investing. And, you know, we really try our best to get everybody to know what they own or what they’re going to buy.
Julian Klymochko: Yeah. Those warrants are effectively, highly leveraged bets on micro-cap, highly volatile stocks, and investors need to keep that in mind. And so, I threw it out there that you’re coming on the show, just on my Twitter feed, asking if anyone had any questions. Popular one that I did get was, you know, we just went through a SPAC bear market. What are your thoughts on the market? Where are you seeing risks and opportunities?
G: I see risks in any of these SPACs that de-SPAC and took off.
Julian Klymochko: Right.
G: Because as we see more and more competition keeps coming to market, I see incredible value in buying units below $10 dollars. I’m just looking at some of my screens now and you know, some of these teams, I’ll just ramble a couple of them off. XPOA.
Julian Klymochko: Yeah.
G: ZNTE. Go look at the sponsored team on that. ZNTE is trading at $10.4 cents for the common, the XPOA is trading at $9.97 cents.
Julian Klymochko: We own both of them.
G: Yeah. It’s not as much fun as chasing XL, when it goes up, you know, 10, 20% a day. And everybody telling me that Pershing Square cheap, well maybe.
Julian Klymochko: Yeah, I don’t agree.
G: Maybe it’s $5 dollar over net asset value.
Julian Klymochko: Yeah.
G: So, I don’t know, 25% over net asset value. I don’t know. Is that cheap?
Julian Klymochko: Yeah, it’s the most expensive one out there.
G: Maybe that’s what they bought
Julian Klymochko: For sure. And you know, the SPACs that you commented on are the ones that are, you know, high quality sponsors that are around net asset value. So low downside risk and, you know, good upside optionality potential. And that’s the type of strategy that I consider it more of a get rich slowly because you stand a very low chance of losing money, as long as you affect the strategy correctly. And don’t hang on to a bad deal, de-SPAC and in addition, you pitch that to investors, but I think a key lesson for investors who perhaps lost some money trading SPACs at the frenzy is that, you know, that the get rich quick schemes like that never works and it doesn’t work in stocks. It doesn’t work in SPACs. It doesn’t work anywhere. And the strategy that you are promoting, effecting and the way to do well in SPACs, it’s more so a strategy that requires patience.
G: It does. Not only does it require patience, but one of the things that I just started doing and actually fairly interesting is, I’m buying some of these units at, or below the net asset value. And what I did is, I set up a secondary account. Now this is in my self-directed IRA. I set up a new account in my self-directed IRA, is that when the units split upon the de-SPAC, I take my warrants and I just journal them into a different account. And I don’t look at them. That just like the added bonus. That’s the cherry on top.
Julian Klymochko: Its free money.
G: I’m mostly looking at the, it’s the free money. And not only is it the free money, that’s the one that if you catch the MP Materials or you catch the DraftKings or you catch one of these, not only did you have your initial buy, which was a smart buy. And again, even if you kicked it out at $15 to $20, 50 to a 100% percent return, well now tucked away in this other little account, I’d have 60 different positions that I have no cost in.
Julian Klymochko: Right.
G: And that little stinky account that I just kind of throw the scraps in. If you extrapolate that number over however many years, we could do this with these SPACs.
Julian Klymochko: Yeah.
G: That’s going to be a pretty significant little bonus account. So again, there’s a lot of ways to do this. Loading up your portfolio with warrants and you know, there’s some people you just can’t knock them. They say, Hey, that’s where the bang is. One of the accounts that I follow is SPAC Warrants, a guy named Jeff on Twitter. Think he’s @SPACWarrants, guy’s brilliant. And he knows, he knows his game and he’ll go in and he’ll buy. And I’ll just name a couple of them just because people always say, you never name enough names. This OCAXW, it’s 57 cents, and he said that he’s willing to buy things like this in the haul. And during the dark days, when the the financial crisis hit in March, he said, some of these warrants were a penny to a nickel bid. You know that’s terrifying.
Julian Klymochko: Right.
G: But if you loaded the gun on penny to nickel warrants, and they came out with, they named even a bad deal, you had a pretty good day. So, his claim is he never buys a warrant believing he’s going to make less than 8X.
Julian Klymochko: Right.
G: And he has his numbers to back it, but he also has a five-year window. He’s not impatient. And he has monstrous returns, but he also has incredible swings. His good days are good and his bad days are bad
Julian Klymochko: Plus, I’m sure, you know, highly sophisticated doing the due diligence, reading all the documents, the S-1, the registration statement, et cetera, to know the exact terms, knowing these things are getting called, know when they could get called and knowing the relevant risks, right? It’s all about being informed and intelligent. And in addition to that, just having a strategy that your confident works and that you’re going to stick with.
G: Well, yeah. And that’s a great point. The other day he said to me, he said, just so you know, ChargePoint and Skillz are in a position that they can call the warrants.
Julian Klymochko: Yeah.
G: So again, as we know, when the warrants get called, that’s usually put some selling pressure on the common. So again, just knowing that. Even if you don’t own the warrants, just knowing that you’re now in the window, where they can, might be something that you could plan for now and take a preemptive move. So, this way you don’t get caught by storm, don’t be in the earthquake. Go to the hurricane, you know, when they’re coming.
Julian Klymochko: Yeah, for sure. So, speaking of natural disasters and how investors can sidestep them, do you have any other advice for SPAC investors out there looking for some tips from the guru himself,
G: I’m going to ask; you know all the numbers. What’s a good money manager return a year?
Julian Klymochko: Well, it depends on, you know, the volatility, the strategy, but I think something in the high single digit range, 7 to 8% annualized over the long term, that’s consistent. I think that is a good expectation to have.
G: Well, the reason I asked you and that’s right about where my answer would have been, but I knew you would know [Inaudible 00:47:00]. People pay managers, people pay people to manage their money and their expectation is high single digit consistent returns. So, if you take that and you just go and you buy SPACs at, or below net asset value as units, and you’re not chasing anything, you’re going to outperform most money managers who are getting paid to be money managers.
Julian Klymochko: Right.
G: And you know, everybody’s wants to have, Oh, I’m looking for a hundred bagger. This is, you know, a hundred baggers. Yeah, you’ll hit once. You’ll miss a thousand before you hit that one. And again, I say it every chance I can. Please stop sending me diamond hands. Just a real quick, and I know we’re over time and thank you so much, Julian when the Churchill Capital and the (CCIV) Lucid deal was trading, and one night I went to sleep and I was very fortunate that this was a big SPAC with over a billion dollars in it. It was below net asset value. And I used it to park cash. I had money in my account that I wasn’t using. And after the DIRECTV rumor on Churchill came out, it was trading well, well below that $10 dollar range.
Julian Klymochko: Yeah, $9.80, $9.90.
G: Okay. I’m going to put some money in here and if I need it, I can access it. And who knows, maybe they’ll do a deal, or maybe I’ll just have to take the redemption. And the whole Lucid thing came out. And the reason that I’m telling this story is, one night I went to sleep and the stock was in its thirties. And I still had my full position in my trading account. This is not talking about my IRA or anything like that. This was my trading account. And based on dollar value, it was a monster position that I typically don’t go that much at risk. And I’m laying in bed and I’m thinking. This deal, isn’t a done deal. This is a rumor. They were rumored that they were going to do top golf, that fell through. They rumored that they were going to do DIRECTV, that never happened. And now this thing’s $35 dollars. And basically, I own a $10 dollar bill that I could sell for $35 dollars. So, I started scaling out of it and I started thinking to myself, do I tell anybody?
So, I said, you know what? I’m going to tell people what I did and why. And I posted that, and I was called incredibly terrible things. I always told them, well, you know that I had no testosterone. I was called the paper in hand. I was told that I was short. I was told that I was hurt. Because it was going to a hundred and I sold too soon. And I’m like no, not any of those things. I still own some in my IRA. They’re like, well, you said you sold it. So anyhow, that was my public feed. And that kind of gets you a little down, or you want to just say, you know, the hell with this, I’m turn it off my account. I’m not getting paid for this. What do I need this shit for?
Julian Klymochko: Yeah, exactly.
G: But in my direct messages where, Hey, I was thinking the same thing when I saw you sold.
And I paid off my student loan. I paid off my car. I’m not in debt anymore. I moved out of my parent’s house, the good things that came through, now granted, it kept going higher and I was mocked and shamed and all those types of things. But when the music stopped and there were no seats left, all those people who posted the diamond hand. Now, all of a sudden, they were complaining, they were bag holders and SPAC suck, and it’s a scam and they got screwed.
Julian Klymochko: Yeah.
G: So, you know, don’t be that guy, know what you’re buying, you know, weigh your risk and reward. $35 dollars, my downside was $10. I didn’t know what my upside was. The last thing, you know, then I’ll go, when you see, a company is going to buy a target that you like, and we’ve seen this happen. People were very bullish. They wanted [Inaudible 00:51:33]. They wanted Sportradar. They wanted Re Automotive and they were all coming up with all these different things. What SPAC they wanted them to go in and why. But what you can do is, you can go to sites like Crunchbase or PitchBook, and you can see if they did different rounds of financing, and what was the last round they did and what was their valuation and how much money did they raise. So, you know, if you went and did that with Lucid, which I did. You go and say, well, okay, well in 2018, they raised this much money, I’ll just make up, an $18 billion dollar valuation. Well, okay, well, it’s probably worth more now, but if there were $18 billion, two years ago, you know, what are they worth now?
They still don’t have any products to sell. And I’m not saying you don’t buy the future and the technology. So, I started running some numbers and I said, okay, well, the SPAC has $2 billion dollars in it, not thinking of an additional $2 billion dollar pipe, but I’m thinking well, at the end of the day, the shareholders are only going to come away with this percentage of the company. And we don’t know what the valuation is going to be. So, on the back of an envelope, you start scratching down some numbers. And now you’re looking at this thing at $60 dollars a share, and now you start looking at who their market cap is equal to, say, wow, wow, this thing’s worth more than Neo, whether you like Neo or not. You say, wow, this is valued, is wow. And now people are saying, it’s going to go to a hundred dollars. So, you go and throw, calculate that number. And you say, Oh, okay, well, they haven’t made a car yet. They’re going to be worth more than For, General Motors, Ferrari, go down the list. And then it just becomes clear that, you know, some of these things can wacky. So again, people need to use their common sense.
Julian Klymochko: Well, that’s a good spot to wrap things up. Some knowledge, insights, vast experience from this SpacGuru and folks, if you don’t follow him on Twitter, it’s a must follow @SpacGuru. If you’re on the tweet machine and G want to thank you for the conversation, always interesting to hear your insights and experience within the SPAC market, because you definitely bring balance. You don’t pump, you don’t dump, and it’s a fair, unbiased comments, and, you know, guiding investors on how to make money in this asset class, which ultimately that’s the purpose of investing. People want to learn how to make money and you really help them in their journey. So, thank you for participating on The Absolute Return Podcast and look forward to more conversations in the future.
G: Great. We’ll have to do a clubhouse soon.
Julian Klymochko: All right, yeah, I’ll be on it.
G: Okay. Thanks Julia. Thanks Mike. Great talking with you guys.
Michael Kesslering: Thanks G.
Julian Klymochko: All right. Bye everybody.
Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.
