The Art of Speculating

And the importance of racquet sports

There’s a big difference between a gambling and a speculating.

For starters, gamblers rarely make money over any significant period of time. They tend to be big talkers. They’ll tell you about a hit, in vivid detail. It’s an important part of their process, which has little to do with profitmaking. They need the excitement, the intoxicating feeling of hope.

The strange truth about the gambler is, they also need the loss. They blame, resent, swear off for good, then return to get the next big payoff. But they never do. It’s a messy way to live.

Speculators on the other hand don’t talk that much about their moves. They stay pensive, maybe even paranoid. They’re well aware of risks. They don’t celebrate wins, and don’t blame outside factors for losses. It’s their responsibility to position accordingly. To be able to digest the outcome, regardless of how the chips fall.

While most people want to speculate, they struggle with it. There’s a war going on inside their heads. They think someone surely has the secret code; they just need the key information early. In the 1920s it was the shoeshine boy, today it’s Reddit.

Novices rush to the market with a wad of hard-earned cash calculating their windfall before making a trade. The tell-tell sign is the never sincere statement, “It’s just play money.”

Or the one I like most, “I won’t blame you if it doesn’t work out.” When I hear this, I know a friendship is about to self-immolate.

What I also know is, they won’t share any cake with me if does work out.

How To Speculate

If you want to speculate successfully, get it clear that it’s nobody’s job to give you notice of 1,000% outcomes in advance…because they can’t. And it’s also nobody’s fault if you fall flat on your face chasing that kind of return.

You might disagree with this, but if you make it as a speculator, you’ll one day understand why it’s so important.

The 1,000% gainers never, ever feel good on the front end. I’ve had more than one 100-to-1 and many 10-to-1s. But I’ve been at this for a long time.

For instance, I had a 10-to-1 work out early this month. I’ll share the details below. Details matter in a case like this. A good speculator wants to know what I learned, when I learned it, and what I did about it.

Meanwhile, the gambler just wants the secret code, the quick fix. There’s no time for details. They also need someone to blame later when things don’t work out.

Instead, try learning the thinking behind my recent 10:1 and at some point, you won’t need me anymore.

The Great SPAC Dump

The trade wasn’t actually a 10-bagger. It was 8.5x to be exact. And it all started with this stock chart.

Typical performance of a SPAC stock

The chart might not look like much. But there is a company behind the round-trip to nowhere in the share price. It’s a real business. And it has little to do with the speculative mania that fueled the great SPAC boom of 2021.

Most people know what SPACs are. Ask your friends. They’ll probably tell you it’s a great way to lose money, or they’ll say something generally negative. And for good reason. Most SPACS left unaware investors holding the bag on bad trades.

SPACs are special purpose acquisition companies. They’ve been around for a long time. It’s a faster way for a private company to go public.

Part of the reason I had a jump on the SPAC mania of 2020-2021 was decades of experience with Canadian stocks.

In Canada, they don’t have SPACS. They have shell companies. Or, “shells.” And they work essentially the same way SPACs do in the U.S.

The SPAC is technically a shell company. They call it a shell because it has no business inside. It’s only an exterior structure. Here’s how they work.

A promoter (person organizing the SPAC) files paperwork establishing the SPAC. They pay filing fees, lawyers, etc., to set things up. In exchange, they receive a chunk of founder shares. That’s stock valued at around ~$0.01/sh.

Next, they file paperwork to offer new stock to institutional investors, pension funds, hedge funds, and the like. The typical offering is 25 million shares for $10/sh bringing in $250 million.

Remember, the SPAC has no business. Its entire purpose is to hunt for a private company to merge with. It has 24 months to find a deal or it must return the $250 million to investors buy redeeming the 25 million shares for ~$10/ea. In this case, the company folds, and the promoter sees no benefit from the $0.01/sh founder stock.

But if the SPAC does find a private company to buy, that target company gets the $250 million of newly raised investor cash, and the quick public listing. The SPAC promoter and the investors who bought $10 shares end up with a small percentage of the merged business after the deal closes.

The promoter is not supposed to have a target company identified in advance…that violates the loophole which allows the SPAC process. This should be a “blank check” entity shopping for a valid merger candidate. The institutional investors buying $10 shares make a bet on the promoter’s ability to find and secure a good deal. In theory, they know what they’re getting into.

Things Got Out of Hand

This arrangement is not new… The problem is, we had a market mania after the flu panic that rivaled any in capitalist history. SPAC promoters took full advantage. They formed SPACs as fast as possible.

This meant we had an army of bankers running around the hinterlands looking for any private business to buy. It’s another case of too much Fed money chasing too few quality investments. But that’s the world we live in. It’s our job to find opportunity when it gets out of hand. And the SPAC boom did just that.

The chart shown above traded like most SPACs. It started out as a blank check firm called EverArc Holdings Limited. That was the listed shell company hunting for a private company to merge with.

It found one. A company with a suite of products used to fight forest fires. You’ve surely seen images of the Forest Service plane dumping foamy, orange liquid on a raging summer wildfire. That’s most likely this company’s product.

Headquartered in The Grand Duchy of Luxembourg with management camped out in the American Midwest, this is a solid business with a unique product.

EverArc Holdings Limited completed the merger taking the company public in November of 2021, which we now know was the effective end of the SPAC boom. Shares started out around ~$12 that month before falling to around ~$3 two years later.

Almost every stock chart of a company created by a SPAC merger looks the same. The day the deal goes live, it starts out around that ~$10 level where institutions bought in. If it’s a high-profile deal, maybe it shoots up. There have been some that flew unusually high.

Then they fall. That’s the gravitational effect of the institutional investors, hedge funds, etc., unloading the $10 stock as quickly as possible. It’s a quick flip trade. Those investors might be in dozens of SPACs, just for the flip. Think of this like people putting a deposit down on a high-rise condo with no intention of occupying it.

And that means when SPACs get the flush, they all go down in lock step. It’s the speculator’s job to decide which ones might make it.

Not So Much the Stock…

Again, it wasn’t the stock that got me.

The whole argument that a stock is cheap rarely works out. Cheap tends to get cheaper.

What got me was the warrants attached to the stock.

The institutions, funds, etc., investing at $10/sh need an extra incentive. It’s not enough for the promoter to promise a good effort in the hunt for a sweet deal the market will love. They want a way to boost returns if that happens, and reduce risk if it doesn’t.

The way this works is each $10 share of EverArc Holdings Limited came with the right to buy another share of stock for $12 at anytime before November 8, 2024.

That right wasn’t worth much with the stock tumbling from ~$12 to ~$3. So, the investors sold it. This warrant trades on the open market.

The value of the warrant fell from a high of more than $2.00 to a low of less than a penny. $0.002 to be exact.

Investors also dumped the warrants

However, after hitting ~$3.00 late last year, the stock started to recover. With all the investor stock dumping over, it kept climbing.

Business fundamentals started to matter. As it approached $12 this summer, people forgot about the right to buy a share at $12.

I paid $1.20 for a few of these warrants in October 2022. I tend to buy a very small, token amount of warrants if I like a business. I keep an eye on them. In this case, $1.20 turned into $0.002.

However, as the stock closed in on $12, the warrants still traded for around ~$0.01. So, I bought more, and more, and then a few more. Early this month when the stock hit ~$13.50, I exercised them booking an 850% gain.

Before we get into the mechanics of that, I’d like to shift gears and discuss something outside the market, which I find much more interesting.

“Chess on The Run”

David Foster Wallace calls tennis, “Chess on the run” in his essay collection String Theory. It’s the most accurate description I know of.

Tennis is a special game, the best game. And I’m a purist.

In fact, there’s nothing more annoying than someone seeing you with your bag of sticks (racquets) and saying, “Do you also play pickleball?”

No, I do not. In fact, I’m bothered my appearance even makes them want to ask. Pickleball is outdoor table tennis.

I also do not play padel, or any other game incorrectly lumped in with tennis merely because it’s played on a court.

Padel is the racquet sport equivalent of polo. I’ve had several offers to join padel clubs, at an initiation cost as high as $30,000. They’re sponsored by luxury car brands, high-rise condominiums, and premium watchmakers, some of which have denied me access to their horologically unimpressive pieces. So, no, I am not a padel player.

Padel doesn’t do it for me…

Plus, padel is a fast-paced, indoor, combination of racquetball and pickleball, played on what feels like tight-weave commercial carpet, with a tennis ball. It doesn’t do it for me.

As far as pickleball goes, I don’t know where to start. The sound of it alone is maddening. I wouldn’t last five minutes being tortured if my captors interrogated me next to a pickleball court.

The thing about tennis is it’s math-heavy, requiring a basic understanding of geometry. Add in physics, spin, gravity, etc., plus offensive and defensive strategy, all at the same time.

I don’t think about anything else when I’m playing…I can’t.

Lines & Angles

All those lines on the tennis court are precise, and important. It starts with the exact size of the court.

At exactly 78-feet long and 27-feet wide (for singles play) the court should always face North to South. This gives each player equal treatment as the sun makes progress across the sky during the match.

The service box takes up 21 of the 39 feet on each side of the net. There’s another 18 feet to the baseline.

And the space between the service box and the baseline is no-man’s-land. They call it that for a reason. You’re dead if you hang out in there. A good player sends shots with heavy topspin to land by your feet. It’s very hard to work with that type of incoming ball.

Then there’s hitting the ball in general. It’s not some crude slap, it’s elegant. If your opponent hits with pace, you quickly get into a beautiful dance. A properly hit ball clears the net by several feet, then falls like a sinking fastball into the backcourt. This assumes you have the forehand wrist speed and delicate touch required to apply topspin to the ball.

Traveling With Racquets

It’s fun to play tennis while traveling.

I spent last week in Los Angeles, CA. I lived there ten years ago, in Venice Beach, which is called the “west side.” I still like Venice, even after Snapchat and Google moved offices there flooding the area with excessively wealthy nerds.

“Have racquets will travel” is how I feel right now. I’m working my way around the nation playing live ball with great success.

Live ball is a 6-person game sometimes called King of The Court. There’s no serving, the pro feeds a ball into play. The ruling duo wins two points to maintain the crown. The opposing pair needs four points to unseat the champs. This goes on for 90 minutes with quick breaks at 30 and 60 minutes.

I find most major cities have public tennis facilities managed by pro staff offering this game. It’s the adult equivalent of summer camp. And I can only read so much Federal Reserve data before I lose my equilibrium. 90 minutes of pro-administered live ball helps keep things balanced.

The cost is around $35-40 most places. Cheap in my opinion. In New York, it’s as much as $100. But still worth it.

Flamingo Park in Miami Beach, FL is a good location. They have 17 Har-Tru courts (green clay) and plenty of live ball offerings. There’s an app for scheduling. No qualification required.

Sutton East in New York is an indoor facility, sometimes called a “lung.” This is the big white inflated dome you see in cold climates during winter months. Under it they have 8 red clay courts. Red clay is more fun than green, though I’m not sure why. There’s high demand for tennis in New York. You need to set up a reservation 10-14 days out.

LA Tennis Centers is my first Los Angeles, CA live ball experience. The Pacific Palisades location has 4 hard courts. There’s also a Westwood location and another in Cheviot Hills. I don’t know where Cheviot Hills is. The desk clerk and the pro at the Pacific Palisades location also had no idea where Cheviot Hills is. I questioned the existence of the town itself.

The only downside to the LA live ball set up is you have to qualify, or get assigned a level by the pro.

Apologies to Wendy & Dominique

Tennis players use a USTA rating system to measure ability.

I had to qualify by playing with a group of 2.5 players. It was painfully boring.

I held king of the court with a guy named Bob who smelled like he was at least 80 but had a mean net game. While I covered the entire baseline, Bob stood in service box like it was a carving station on a cruise ship. He couldn’t move otherwise. We reigned for 26 minutes straight…and several shorter slots before and after.  

During that time, which could only be described as a barbarous slaughter on court 2, I one at a time annihilated the 2.5s. They had poor groundstroke skills. On well-hit shots they’d turn sideways in fear instead of positioning to return the ball. Domonique got hit in the IT band area and Wendy took a heater to the upper thigh.

Either way, the Madagascan pro Toky liked it. He’s tired of the 2.5 people...who play like 2.0s. He apologized for the qualification stunt, and offered me 3.5 level live ball going forward. That’ll work.

If you travel, consider taking a racquet with you, or racquets. Your schedule surely has room for physical exertion, and finding it with a racquet sport is mentally stimulating. It’s a world away from the experience you’ll have under the sterile lighting of the hotel gym.

Now, let’s get back to the business of speculating.

The 8.5-Bagger

The strike price of my warrant was $12. If the stock closed below that level on November 8, 2024, the warrant would expire worthless. I felt ~$0.01 was a fair price considering the all-or-nothing risk.

Turns out, it worked. With the stock trading around $13.50 in early October, I exercised the warrants. This was as easy as calling my broker to initiate the exercise.

Brokers are pretty useless these days, but they do have extensive back-office capabilities that prove helpful in situations like this. You still need to ask specifically for what you want though, as they have limited acumen.

The warrants went out of my account and the shares showed up a week later. The position shows an 850% gain between current value and my cost basis.

While I bought some warrants as low as $0.009, I had the initial chunk at $1.20 and continued to buy them as the stock climbed above $12 this year. I invested just shy of quadruple the amount I normally like to use when buying a warrant.

I felt a little crazy continuing to buy them. I asked my friends to look at it, most were either busy or felt like they didn’t have relevant experience.

I also wondered if I got the math wrong. By my calculation, the converted value was $1.50 when I exercised…while the warrant still traded for a fraction of that.

Here’s how it works…including the ticker information. Between now and expiration you might want find the information useful.