Market volatility is a tale as old as time.
Although the stock market continues to decline as we move further into 2022, Nicholas Vardy reminds readers of a savvy investor who preserved his fortune amid a market crash.
The story behind Mark Cuban’s fortune demonstrates the power of patience. With just a bit of time and the perfect stocks, you could be the next Mark Cuban.
That’s why Alexander Green and longtime Oxford Club Member Bill O’Reilly want to share with you the details on four stocks that could lead to major profits in just two years.
The two sat down to talk about Alex’s next wealth-creating prediction. The conversation left Bill stunned.
Although we’re seeing the highest inflation rate in decades, mounting tax hikes and a growing national debt, Alex and Bill discuss breakout “buy now” sectors that could lead to massive growth in the years to come – despite market volatility.
Learn more here.
January is shaping up to be the worst month for the U.S. stock market since the start of the pandemic in March 2020.
Investors in cryptocurrencies have endured a 50% drop in the value of Bitcoin.
Cathie Wood’s Ark Innovation ETF (NYSE: ARKK) is down 27% just this year, as this bull market’s hero pounds the table that “innovation is on sale.”
Wood may turn out to be correct. And disruptive stocks may yet overcome their January jitters.
After all, seasonality is in their favor. The period between November and May is historically the strongest time of the year for the U.S. stock market.
On the other hand, the recent sell-off in speculative assets of all stripes may signal the end of the post-pandemic bull market.
And that would mean trillions of dollars wiped off the value of investment portfolios around the world.
Many brilliant people in history have gotten burned by collapsing markets.
Sir Isaac Newton – the father of physics and calculus – lost a fortune by betting on the South Sea bubble.
Yet a handful of investors managed to make money during times of market turbulence.
Today, I want to revisit one of my favorite stories of how a savvy investor made – and preserved – his fortune amid a market crash.
How Mark Cuban Made His Billion-Dollar Fortune
Few billionaires in the U.S. have a higher public profile than Mark Cuban.
Boasting a net worth of $4.5 billion, Cuban has established a media presence as a host of ABC’s reality show Shark Tank.
This fellow Pittsburgh native also owns the NBA’s Dallas Mavericks.
What you may not know is the remarkable story behind how Cuban made – and kept – his first billion-dollar fortune.
Cuban’s story offers a terrific lesson on how to protect your portfolio from the ravages of the next market crash.
Let me explain…
In 1998, Cuban and his partner Todd Wagner sold Broadcast.com to Yahoo for $5.7 billion.
At the time, Cuban received 14.6 million shares of Yahoo, then trading at $95.
With his shares worth $1.4 billion, Cuban became a billionaire overnight.
The internet bubble had minted several other paper billionaires. But after the bubble popped in March 2000, few of them got to keep their newfound wealth. (Even Jeff Bezos watched his wealth evaporate as Amazon’s stock price dropped 95%.)
Cuban was the rare exception.
That’s because he had the foresight to execute one of the most remarkable options trades in financial history.
After selling his company to Yahoo, Cuban knew that Yahoo stock was funny money. (As part of his deal with Yahoo, Cuban could not sell his shares immediately.)
So he entered a massive options trade to lock in much of his $1.4 billion value stake.
For every 100 shares of Yahoo stock he owned, Cuban bought one put contract (strike $85) and sold one (strike $205). The term of each option was three years.
He bought and sold a total of 146,000 puts and 146,000 calls.
The cost of the puts precisely offset the premium of the calls. This made the trade essentially free.
So how did Cuban’s big bet pan out?
Yahoo’s share price went on to hit $237 by January 2000 – far above the sale price of Cuban’s $205 call options.
For a while, Cuban’s trade looked like a painful and expensive mistake.
Then the internet bubble burst.
By late 2002, Yahoo had tumbled to a low of $13.
Cuban would have lost more than 85% of his wealth had he not hedged his position.
Instead, thanks to his options trade, Cuban kept almost all of it.
Put another way…
Cuban didn’t become a billionaire when he sold his company to Yahoo for $1.4 billion.
He became a billionaire when he proved he could keep the money.
Of course, this trade looks brilliant with the benefit of 20/20 hindsight.
But it was far from “easy money.”
Cuban had to wait four years before his option bet panned out.
In the midst of a bet that goes against you, this can seem like an eternity.
Here’s the good news…
Today, you too can place a similar trade – whether you implement a spread options trade like Cuban did or fortify your portfolio in other ways.
I wish you luck.
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