Three Reasons Not to Follow in Peter Thiel’s Footsteps

Keith Fitz-Gerald Jan 05, 2018
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News broke early this week that billionaire tech investor, Peter Thiel, had dumped $15-$20 million in Bitcoin back in mid-2017 via the Founders Fund, a venture capital investment company he co-founded. Not surprisingly, Bitcoin jumped 10.7% from $13,742 to $15,214 when the headlines hit.

Predictably, there are a lot of investors out there who are now wondering if they should do the same thing and “bet big” too.

Don’t.

Look, I get that Thiel is a modern-day investing hero. He co-founded PayPal Holdings Inc. (NasdaqGS:PYPL) and was the first outside investor of Facebook Inc. (NasdaqGS:FB) in August 2004. I think the man is a genius, especially when it comes to recognizing early stage opportunities.

Still, that’s not an excuse to follow him blindly.

Any investor who does is playing with fire and risks financial ruin for three reasons.

Reason 1: Thiel has so Much Money That He Can Play by Different Rules

Peter Thiel is part-genius, part-oracle, and part Robin Hood. Long a proponent of doing the right thing, he’s one of the few “good guys” in Silicon Valley. An outspoken libertarian, he’s also one of the richest, thanks to his success.

Thiel and his Founders Fund reportedly have more than $3 billion under management. That means the $15 – $20 million position everybody’s so excited about amounts to between 0.5% and 0.6% of assets under management on an unleveraged basis when established. What’s more, Thiel’s Bitcoin position is likely held in check by other investments including shares of SpaceX, Airbnb, and Lyft, just to name a few.

My guess is that Thiel’s Bitcoin investments are probably leveraged as well, which means he’ll get a higher return for every dollar invested with far smaller pools of capital than you or I could.

Not to rub it in, but Thiel could buy a hundred shares of Amazon.com Inc. (NasdaqGS:AMZN) at $1,204.20 a share, and the $120,420 needed wouldn’t amount to a rounding error in his brokerage account… whereas that amount of money would break most Americans if they had to cough it up.

Reason 2: Thiel May have Already Sold Out Partially or in Full

Big numbers and big profits are alluring, especially in situations like this, where Bitcoin’s stellar rise has created an almost cult-like following and FOMO – the fear of missing out.

What most investors fail to realize is that reports, like the one in question, stem from SEC filings and other reporting documents that are filed weeks or even months after a position was established.

In this case, the Wall Street Journal, which broke the story, appears to have cited sources familiar with the situation. That’s a dead giveaway that the train left the station months ago. It’s also an indicator that there is no direct link to the underlying data… just anecdotal evidence.

It’s entirely possible, for example, that the Founders Fund has already sold out of Bitcoin and has timed the information to coincide with an exit strategy.

Called “talking your book,” this is a very nasty insider’s trick designed to get you interested in whatever they want to sell.

We’ve talked about this before.

A fund manager who wants to sell a specific security or financial instrument like Apple Inc. (NasdaqGS:AAPL) or, in this case, Bitcoin, may plant stories or conveniently publish a “report” about how great a particular investment is to get the public interested. Then, he or she uses that same buying pressure to sell out and head for the hills… leaving you holding the bag and at wildly inflated prices I might add.

The Goldman Sachs Group Inc. (NYSE:GS), for example, made billions of dollars in profits by short-selling the markets before the Financial Crisis in 2008, even as the firm packaged hundreds of millions of dollars’ worth of toxic sub-prime notes into collateralized debt obligations (CDOs) it sold to clients – including other banks, pension funds, and even individual investors who went on to suffer big losses as the world’s financial markets cratered.

To be clear, I’m not saying that’s happening here. In fact, given what I know of Thiel’s ethics, I rather doubt it; I’m simply raising the possibility with the goal of making you a more informed, more profitable investor.

My goal for you is to be able to correctly and profitably evaluate the headlines, and not get sucked in blindly like millions of investors will be.

Reason 3:  You Can’t Know if Thiel’s Bitcoin Play was Speculative

It doesn’t matter whether you’re talking Peter Thiel, Warren Buffett, Carl Icahn, or even the legendary Jim Rogers – you have no idea whether an investment they’ve made is one they view as a core holding or a speculative bet.

Following along may put you and your money at odds with their view of the same investment – meaning you may think they’re investing when in reality they were speculating or vice versa.

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For instance, Warren Buffett paid $244 million for shares of two Irish banks he thought were undervalued, only to see them eventually written down to $27 million… an 87% loss. Investors who tried to emulate his move got similarly burned. To this day, it’s not entirely clear whether he was speculating or investing.

My point is that Thiel’s investments – like Buffett’s – and the scale of the capital he puts into them, suggest that there are clearly times when he is speculating, despite the fact that his moves appear to be investments to the mainstream media and uninformed investors.

Unless you understand which is which, and have a deep enough bank account to absorb losses that could be a few hundred million or more on similar trades, you’re playing with fire. You’re also risking complete financial ruin.

So, now what?

I still think Bitcoin is a bug in search of a windshield. Sure, it’s been an immensely profitable speculative bet to date, but that does not mean it will be a great investment in the future.

For that, you’ve got to turn to two companies like the ones I mentioned in this column – “How to buy Bitcoin without buying Bitcoin.”

Or, find other ways in at a fraction of the risk.

Speaking of which, Bitcoin may come and go but cryptocurrencies aren’t going to disappear anytime soon. I have no doubt that we’re going to be talking about ’em for years to come.

The only question – and the one that should concern you, just as it concerns me – is how to play the situation for maximum safety and profits.

Until next time,

Keith

One Response to Three Reasons Not to Follow in Peter Thiel’s Footsteps

  1. Keith Keister says:

    No one has yet to explain how to get something (BITCOIN) from nothing. Bitcoin mining?! Sounds a lot like speculation. As much as I look and research about what bitcoin mining is, more questions go unanswered. Have these bitcoin people lost their mines? No pun intended. Keith, anything you can explain about this phenomenon would be appreciated. I do not intend to speculate on this frenzy.

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