Rule number one of investing is that you don’t buy what you don’t know and can’t understand. Social Capital Hedosophia VI (NASDAQ:IPOF) violated this rule, and the speculators who bought IPOF stock paid the price.
The huge injections of capital by the Federal Reserve and the 2017 tax cut combined to bring a lot of “stupid money” to the market. Some of it went into Social Capital Hedosophia VI, which closed yesterday at $10.30 per share.
The shares are now trading close to their fair value. They were originally valued at $10 per share. If the SPAC fails to find a merger partner by November 2022, it could be shut down, and its shareholders would get their money back.
If that does happen, the SPAC’s investors should consider themselves fortunate.
Shocked About Chamath’s Gambling
Many investors have become horse-race bettors. SPACs are cheerleaders who have to be trusted by the gamblers who buy their shares. The SPACs offer little or no proof of their contentions.
In this case, the cheerleader is named Chamath Palihapitiya. He is in his mid-40s, he’s charming, he speaks clearly, and he has a lot of confidence. The same was true of Prof. Harold Hill in The Music Man. (A revival of that movie, starring Hugh Jackman, is due out in December.)
But Palihapitiya has something Professor Hill didn’t have. He has a track record. He was an early executive at Facebook (NASDAQ:FB). When it was a venture fund, his Social Capital entity backed winners like Yammer (which is now part of Microsoft (NASDAQ:MSFT)). Social Capital also backed Slack (NASDAQ:WORK), which is now being bought by Salesforce.com (NYSE:CRM).
When Palihapitiya discovered the Special Purpose Acquisition Company (SPAC) concept late in the last decade, he was excited about it. He could take private companies public through a shell, bypassing the costs of gatekeepers like Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS). Palihapitiya found that he could tout his targets just by going on CNBC, the town square of investing, and talking about them.
There Was No “There There”
On one side of the SPAC phenomenon are many investors who can’t put their money in big private funds because they don’t have enough cash to do so. On the other are a lot of private companies that need money and may no longer be able to obtain funds from private funds on favorable terms.
The merger partners of Palihapitiya’s first two SPACs were Virgin Galactic (NYSE:SPCE) and Clover Health Investments (NASDAQ:CLOV). I personally like SoFi, which his fifth SPAC is bringing to the market. But those who buy a fund that hasn’t announced a target are not investing and not even speculating. They’re gambling.
Without a target, IPOF stock is purely a bet on Palihapitiya. Before Virgin and Clover stock started falling, he looked like a good bet.
I like to say an investor should play the jockey more than the horse. I look for good companies with CEOs who can execute on the plans they make. But Chamath Palihapitiya isn’t the jockey in this case. He’s not even the trainer. At best, he’s the owner, sitting in his box in the grandstand. When he sold his personal stake in Virgin Galactic in March, he was no longer even its owner.
The Bottom Line on IPOF Stock
When Palihapitiya sold his Virgin Galactic stake, he popped the bubble of confidence surrounding him. It’s like he told people to join him on the ride and, after he had made sure that they were in their seats, he waved goodbye to them.
To put it another way, he sold a town of yokels on the idea that they could have a school band by simply buying instruments and uniforms. Then he walked away with his profits, in the form of the school librarian.
Chamath Palihapitiya is the real Professor Harold Hill.
At the time of publication, Dana Blankenhorn directly owned shares in MSFT and FB.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.