A recent story in the NYTs “He Built a $10 Billion Investment Firm. It Fell Apart in Days” chronicles the rise and fast fall of private equity investor Bill Hwang:
- “Trading at roughly $12 a little over a year ago, ViacomCBS’s stock rose to about $50 by January. Mr. Hwang kept amassing his stake, people familiar with his trading said, through complex positions he arranged with banks called “swaps,” which gave him the economic exposure and returns — but not the actual ownership — of the stock.”
The story is unremarkable in the abstract, as the cause of the implosion is the same as what happened during the 2008 housing market crisis: big banks created derivative financial instruments (swaps) and when the underlying value of the stocks those borrowed holdings were anchored on fell, there was a sudden margin call by the banks to cover their positions. Mr. Hwang’s $10B investment firm, Archegos Capital, was structurally unsound, with success dependent upon the assumption that ViacomCBS and the other three major holdings would just continue to go up. As long as share price increased in value, the derivatives would have outsized returns. But if they fell in value, there was nothing really left to sell to cover the losses as share “ownership” was based on borrowed shares/money.
It’s a good article and describes the complexities of what happened, but the main takeaway for retail investors is that you should avoid options trading. When you take out a put or call option, you’re essentially borrowing other people’s shares betting that the stock will go up or down. Like Mr. Hwang, if you guess correctly you can make a lot of money very quickly. And if you guess wrong, you can lose your shirt. Plus the true power of investing is actual share ownership, because you have literal stake in the company itself. Better to have the solid position of ownership than try to guess which way the wind is blowing over a month’s time before options expire.
“A bird in the hand is worth two in the bush.” — Famous proverb