What do WeWork (NYSE: WE) founder Adam Neumann…
Theranos founder and CEO Elizabeth Holmes…
And, yes, even Tesla (Nasdaq: TSLA) CEO Elon Musk have in common?
The overarching plot of each of their stories is remarkably familiar.
Take a cult-like leader with a larger-than-life personality who makes enormous but patently unfulfillable promises…
Attracts an army of irrational true believers…
Crushes all dissenters – whether from inside or in the media…
But in the end, like Icarus in Greek mythology, flies too close to the sun, their wax wings melting and sending them inevitably back to earth.
Neumann convinced investors that a generic office-sharing business could “elevate the world’s consciousness” – and was worth $47 billion.
Holmes recruited world-class bigwigs, including Rupert Murdoch and Henry Kissinger, to support her vision of a simple blood test that would revolutionize healthcare.
Musk transformed Tesla – a struggling, niche electric vehicle manufacturer – into a company worth $1.2 trillion at its peak despite never making up more than 1% of global car sales.
What was their secret?
It’s a concept that the eminent Princeton philosopher Harry G. Frankfurt described in his book On Bullshit.
And it just might be the most crucial investment concept you have never heard of.
I Can Smell It From a Mile Away
Mention any public figure in casual conversation to my friend Nassim Taleb and his first question is often… Is he a bullshitter?
I confess that I share that trait. I can smell bullsh!tters a mile away.
That’s why I’ve always struggled to understand how millions can buy into what, to me, is such obvious b.s.
In that way, I’m far more like Charles Munger – whose law firm once offered me a job – than Elon Musk.
And in this financial era, there are no bigger bullsh!tters than those peddling cryptocurrencies.
As Munger eloquently put it…
It’s like somebody else is trading turds, and you decide you can’t be left out.
In that spirit, today, I want to add another name – Terraform founder and lunatic developer Do Kwon – to the pantheon of bullsh!tter CEOs.
Last week, two leading cryptos – TerraUSD and Luna – collapsed.
Almost $45 billion of “value” evaporated over a few days.
The collapse claimed some high-profile casualties.
“Poor again,” wrote the founder of crypto exchange Binance on Twitter.
This was after the value of his “investment” in Luna dropped from $1.6 billion to less than $3,000.
That’s a 99.9999% loss.
The Rise and Fall of “King Kwon”
Kwon’s rise was as meteoric as his fall was spectacular.
While a student at an elite foreign language high school in Seoul, Kwon founded a teen-focused publication he distributed to 60 schools and 100,000 people in South Korea.
By the time Kwon had set off for Palo Alto, California, the project had generated $500,000 in profits.
In 2010, Kwon, the teenager, was just one of those impossibly impressive kids who ended up at Stanford.
But unlike Stanford dropouts Elizabeth Holmes and Elon Musk, Kwon graduated in 2015 with a degree in computer science.
But with his entrepreneurial instincts, Kwon lasted just three months at both Apple (Nasdaq: AAPL) and Microsoft(Nasdaq: MSFT) before setting out on his own.
By 2018, Kwon had co-founded Terraform Labs in Singapore, and in 2020, he launched the TerraUSD stablecoin.
Unlike speculative coins like Bitcoin, TerraUSD promised to hold a steady value of $1. Moreover, it maintained this peg with an algorithmic relationship with the Luna cryptocurrency.
Kwon even named his daughter Luna, tweeting, “My dearest creation named after my greatest invention.”
Brash as a Brand
Far more interesting is how Kwon pulled it all off.
The details differ from the tales above, yet the story is familiar.
Former Terraform employees compared Kwon to a cult leader.
His army of supporters dubbed themselves the “Lunatics.”
Investors were mesmerized by Kwon’s genius.
Mike Novogratz – the 57-year-old CEO of venture firm Galaxy Digital – even got a Luna tattoo on his left shoulder.
But it was Kwon’s shocking arrogance that became his trademark.
After a British economist raised doubts about his algorithmic stablecoin model, Kwon wrote…
I don’t debate the poor on Twitter, and sorry, I don’t have any change on me for her at the moment.
While describing the computer code behind Terra as “the oldest and most widely used algo[rithmic] stablecoin in existence,” he added, “Bow before the king.”
The Rise and Fall of Luna
Look beyond Kwon’s fancy algorithms, and TerraUSD was little more than a massive Ponzi scheme cloaked in crypto garb.
At first, Terraform Labs attracted hundreds of millions of dollars of investment from venture capital firms.
But it was Kwon’s decision to offer investors an annual yield of 20% that morphed TerraUSD into a scam that could now land him in jail.
Over just one year, retail investors deposited about 15 trillion South Korean Won with Terraform. That’s about $12 billion.
Engineers inside Terra knew they did not have enough funds to back the value of the stablecoin.
But “King Kwon” ignored their warnings.
Then came a currency run on TerraUSD in early May.
The TerraUSD/Luna ecosystem’s delicate algorithmic balance collapsed.
And TerraUSD’s peg to the dollar broke.
Kwon scrambled to buy $3.5 billion of Bitcoin to stabilize TerraUSD’s value.
But it was too late. Faith in Kwon’s algorithm had evaporated.
“Bow before the king,” indeed.
Lessons From the Cult of Kwon
WeWork, Theranos, Tesla and TerraUSD weren’t “investments” in the way that, say, buying Costco (Nasdaq: COST) is.
Strip away the hype, and they are sandcastles built on b.s.
Understanding their success – and inevitable failure – has more to do with human psychology than investing.
And as it turns out, the power of the “big lie” has been used throughout history by financial charlatans and dictators alike.
In his 1925 book Mein Kampf, Adolf Hitler described the use of a lie so colossal that no one would believe that someone “could have the impudence to distort the truth so infamously.”
Put another way…
The bigger the lie, the more people will believe it.
And the results of this unfold like historical clockwork.
So the next time you are tempted to invest in anything based on a cult of personality, remember the story of young Kwon.
Instead, take Charlie Munger’s advice.
“Don’t trade turds.”
Click here to watch Nicholas’ latest video update.