Nik Bhatia: Welcome back to the Bitcoin layer. I'm Nik Bhatia. And today we bring back Michael Saylor. Michael, thank you so much for joining us again.
Michael Saylor: Yeah, awesome to be here, Nik.
Bhatia: So, Michael, we brought you back to talk about the stock market versus Bitcoin. Last time, you gave us an amazing set of metaphors to compare Bitcoin and commercial real estate, the advantages that Bitcoin has over this other type of store of value commercial real estate. Today, we want to talk about the stock market. So many people equate Bitcoin with the stock market because they both are trading as risk assets in the markets today. But we know that that's only one aspect of this relationship. So today, I wanted to start by asking you about the potential comparison of Bitcoin to stocks. What are the benefits of owning stocks before we get into Bitcoin? Why do people own equity?
Saylor: Well, I think there's two questions there. Like, how does Bitcoin compare to stocks? And then why do people own equity? Why don't I start with the first question? What's the difference between Bitcoin and owning a stock? I think that, first of all, Bitcoin is a commodity that is scarce, where the primary use case is money, or that is a long term store of value. So the reason you want to hold Bitcoin is you want to own a product on an open network for a long period of time. And its use case is to be money. And so the value in use is store of value. Now, when you're holding a stock, you're holding a share of equity in a company. In essence, you're owning a corporation as property. If your goal is to own that as a store of value over a long period of time, then of course, that is competitive to Bitcoin, financially speaking. Some people own companies for other purposes. And we could talk about those. But I think it's instructive for an investor that's thinking about whether they want to allocate to Bitcoin, or whether they want to allocate to equity, to consider the difference. So I think the place you got to start is if you are a company, you're an economic creature. And everything in the economy, everything in the world wants to kill you. And you need to have that understanding. Whereas Bitcoin is like a monetary virus or an energy virus. A corporation is a creature. And so if you want to understand the risks that corporations face, it's instructive just to start by reading the 10 Ks of publicly traded companies. So I would say a very practical education would be to purchase, to get the 10 Ks of 10 or 100 different companies, and just start to read all the risk factors. Because these are actually pretty well written. Corporations spend a huge amount of money on lawyers, and the lawyers are highly educated, extremely thoughtful, extremely articulate, and very risk averse. And they will write pages and pages and pages of risk factors. This is the answer to the investor's question. If I invest a dollar in this company, what could go wrong? And they give you an answer. And they really give you a parade of horribles. I've spent many, many years of my life. Since 1998, I've been a public company officer. So I've been studying public company prospectuses and general business risk, probably since two years before we came public. So that goes back away. And if I were to catalog them into a variety of classifications, I would start here.
I would say the first risk of any investor in inequity is governance risk. You're risking your money based upon proper corporate governance exercised by the board of directors and by the management team. So the officers and the directors. If the board is bad or goes bad, or if the directors go bad, they can embezzle funds from the company. They can drive the company off a cliff. They can create a civil war within the company. If they can't work out their issues with each other, or if they can't navigate all of the challenges that approach the company in the future, then the entire thing breaks down. So governance risk is a challenge. And governance risk illustrates the general underlying challenge of corporations in general, which is the people are the weak link. Corporations rely upon human beings and human action is ultimately the source of most of the liabilities and companies. And what you find is the more human action that is required to run the operation, the more risk there is. And many of the greatest corporations and the most successful equities are the ones that manage to execute on a business strategy with the least amount of human behavior. If the business is so simple that it doesn't need people and there are no decisions to be made and it runs on autopilot, those are generally good businesses. And the more people involved and the more decisions need to be made, the more risky it is. So the first risk factor is governance risk.
The second risk factor is operational risk. Every business has to do something, whether it's serve food or manufacture ketchup or ship products from point A to point B or fly airplanes or run a factory. The fact that it does something is operational. And if you don't operate the restaurant or the steel refinery or the aircraft properly, then the shareholders suffer. And it takes normally great degrees of talent, sometimes courage, sometimes commitment in order to operate that business. And in the event of strange volatilities in the environment, the operation gets harder. But operation is never easy. If you've ever been in a steel refinery or an oil drill rig, you would know, or if you ever try to fly an airplane yourself, even under the best of circumstance, it's not easy to operate. So that's the second risk.
The third risk is strategic risk. In my experience, most of the software companies that we competed against, they failed because the board and the CEO made a bad acquisition. So the company will decide strategically, we need to enter a new business. We're threatened by something. And they will change the operation. And maybe the strategy is I'm going to acquire another company. So I pay $10 billion for a company that's really only worth $1 billion. And I blow up $9 billion of shareholder capital in one deal. That's just a strategic faux pas. The operation can be fine. But in one decision, the board and the CEO destroyed billions and tens of billions of dollars of shareholder capital. And oftentimes, when you make those dilutive acquisitions, where you buy something which just blows up in your face, then it's hard to recover from that. 90% of the time, 99% of midsize software companies fail, go out of business because of dilutive acquisitions. In my career, every single one of my competitors went out of business because it did a string of dilutive acquisitions, which were ill-advised, where they were a weak company. And they bought other weak and dying companies in an effort to stave off their own corporate demise. And they just accelerated their own corporate demise while they undermined their product. Even strong companies make these mistakes. Like Microsoft bought portions of Nokia and took multi-billion dollar write offs. SAP took a $10 billion write off. It's always happening in one shape or former another. That's the third risk.
The fourth risk is financial risk. A company has a lot of money moving around. They have to put it in banks. In my career at MicroStrategy, we had money in a Brazilian bank. The bank was embezzled by the CEO. We lost the money. We had money in an Argentine bank. The Argentine government froze all the assets, devalued them. We lost the money. If you actually trust your money to a counterparty and they steal it from you, you're in trouble. There's credit risk. There's counterparty risk. There's banking risk. You always have it everywhere. And if you trust the wrong financial counterparty, they'll bankrupt you. In the crypto industry, we saw lots of companies go out of business, in some cases, because they trusted another counterparty or they had their assets in another bank.
The fifth risk is competitive risk. Maybe I'm the best in the world at something. Nokia was the greatest mobile phone company and they got wiped out. Somebody else produces a product that's better than mine, that's cheaper than mine. They might be an end kind competitor. I'm a restaurant. Someone else has a better restaurant. They wipe me out. I manufacture steel. Someone manufactures steel cheaper. They wipe me out. I'm an airline. Someone else has cheaper flights. They wipe me out. You cannot avoid competitive risk over the long term.
But there's another kind of risk, which is not in kind competition, but I'll call it technology risk. I'm the world's leading manufacturer of horse buggies. And then Henry Ford comes along with the car and nobody wants horse buggies anymore. Or I'm a horse breeder, or I'm a buggy whip manufacturer, or I produce electric light bulbs that are incandescent, and then people want fluorescent. And then I have fluorescent light bulbs and they want LED light bulbs. And so over time, new types of technology. I'm the world's leader in typewriters and the people want mainframes or computers or word processors. And I'm Wang and I'm the leader in word processors and I got wiped out by the PC. So there are always technology cycles. And here it's a cruel risk because the world is full of examples of companies that got wiped out by a better technology, Xerox, Kodak. But the world is also full of companies that got wiped out because they saw the new technology coming. And so they made an acquisition or they invested obscene amounts of money to compete and they still failed even though they thought they were going to compete. And so this technology risk drives that strategic risk element up. People justify bad strategies based upon technology threats. And of course, the reason that they make the $10 billion strategic mistake is they thought they were fending off the... Time Warner decided to merge with AOL and one of the most catastrophic failed mergers in history because Time Warner said, yeah, we need to get into video streaming and the internet and the internet represents a risk to the media business. So the solution was to buy AOL for $150 billion. Now, AOL said, oh, we're at risk from Google and the like. And so we have to sell ourselves. So you have one frightened struggling company merging with another frightened struggling company. And the result when the dust settled was something like $150 billion to $200 billion of shareholder capital got wiped out. And was that a governance failure or was that a strategic failure or was that a technology failure? All those risk factors drove people to like light $100 billion on fire. They all thought they're doing the right thing. But of course, this is human action. The risk factor is there's someone that has the ability to issue $150 billion worth of stock in order to solve a problem. As we know by looking at the world, oftentimes when you have someone with enough power to make a $150 billion decision, it's coin flip. They might make the right one, but they might make a $150 billion mistake. And the difference between that and Bitcoin is in Bitcoin, nobody has the power to issue $150 billion of new Bitcoin. If they did, then you have 100 reasons why we ought to do it every month that someone comes up with it. People are very creative at coming up with reasons to do things and they have an interest in it. So people basically become, you could call them hypochondriacs. They imagine that the world will end if they don't save the whale, save the seal, stop the carbon, stop nuclear power, if we don't get to the moon, if we don't get to Mars, if we don't not get there, if we don't start the war, if we don't stop the war, if we don't change everybody, stop nylon, if we don't stop oil drilling in the Gulf of Mexico, everybody imagines things. If we stand too close together, if we don't close the schools, if we let people get on airplanes without getting scanned and metal detectors, if we don't, if we don't, if we don't, there's always a risk and every risk justifies $100 billion or $1 trillion decision. And generally they're all mistakes. But if you can make the decision, then you probably make the mistake. So technology risk is facing your firm. Over 100 years, you're going to find whatever you're producing gets attacked. What lasted 100 years? John D. Rockefeller's oil companies, they produced a barrel of oil. What was the threat? Well, it was threatened by electricity, electric cars. Did it work? Well, first it tried. Then we had electric cars in 1920, but they failed. But then 100 years later, they didn't fail. Nuclear power was a threat. Natural gas is a threat. Liquified natural gas is a threat. Oil from another country is a threat. Everything's a threat. Maybe we shut down nuclear power plants. It's not a threat. Maybe coal is a threat. Maybe we won't need as much energy anymore. Solar is a threat. Maybe wind is a threat. Maybe hydro is a threat. Everything is a threat or it isn't a threat. And you have to live through 100 years of that. And that means you got to have a board of directors deciding whether to spend all of the shareholders' money to fight threat. And of course, a lot of times the answer is I have to have the resolve to not react to the threat because nine out of 10 or 99 out of 100 threats don't form. But then occasionally the threat does form.
So then you got seven, political risk. And political risk can come from the mayor of your town. The mayor decides that they don't want to have your kind of business within city limits. And so they zone it out. Actually, it can start the neighborhood zoning board. They can zone you out. Then the mayor can zone you out. Then the governor can change the regulations. Like right now, New York state is suing Paxos over their stablecoin. Okay, that's a New York action. It's not even a federal action. So the state can take action against you or your own country where your domicile can take action against you. Or a foreign country, another nation state, can take action against you, banning you from their business or their citizens. So you never know where those political risk will come from. But political risks work because a corporation has nexus and it has legal standing, which means there's a CEO that's going to actually have to fly around the world. So you think that you're immune, but say you operate an online poker site and then you are domiciled in Monaco or you live in UAE. Well, so the CEO of the online poker site is flying from Monaco to the Bahamas on vacation and the airplane stops in DC to change planes. And then he gets arrested in DC because he's crossed the US jurisdiction and he gets arrested because he's a person moving through United States airspace. And while it might be legal to operate poker sites in cyberspace or outside the US, it's not legal in the US. And so there you have political risk and it happens.
Companies have a locational nexus and so that takes us to risk factor eight, facilities risk. If you have a place, if you have a factory, if you have a restaurant, if you have a ship and it's in a place in the world, then you have a risk to it. And the risk is you have to cross into some geopolitical jurisdiction where it may be either illegal to do that or it may be regulated. You can do that, but you have to collect a huge amount of information on your customers. And since you don't have that information, then that's illegal. Or you have a boat and it has 10 bottles of wine on it, but you didn't pay customs duties on the bottom bottle of wine and you move through our 12 miles offshore and now that's illegal. You just became an illegal cargo smuggler because you didn't get these stamps on that crate. And so the facilities risk is, in our industry, we saw it with the crackdown of Bitcoin miners in China. You have a miner in China, the Chinese government decides they don't want you to mine Bitcoin in China. Okay, there's your facilities risk, hard to move the facilities. So corporations oftentimes have facilities of one sort or the other. If you bottle ketchup or if you bottle carbonated beverage and if you have one factory, then your facilities risk is very concentrated. So when the state or the city or the nation shuts you down, you've lost everything. The way that Bitcoin, for example, mitigates this is that Bitcoin is decentralized. So in fact, Bitcoin has thousands of facilities in 100 jurisdictions and you could shut down all of them in any jurisdiction and it would have zero effect on the value and the efficacy of the asset itself. In fact, you could shut down 99% of the facilities and 99% of the jurisdictions and Bitcoin is just as valuable as it was. Bitcoin with 3X of hash rate is still the most secure crypto asset in the world. And so Bitcoin is an example where you can diminish the facility by 99%, but it doesn't diminish the value proposition. But now imagine shutting down 99% of the Four Seasons hotels or 99% of the Coca-Cola refineries or 99% of the anything, steel refineries. Well, you've got 1% of your steel left and 1% of your manufacturing left means the equity has no value. So the facility's risk is tangible for a corporation that produces things, but it really isn't tangible for something like Bitcoin because it's so anti-fragile and decentralized, not effective.
Now we take number nine on my hit parade is regulatory risk. And here this refers to the fact that the regulators can create rules for what you do and they can change the rules. Like for example, is it legal for me to sell a box of cereal? Is it legal for me to operate a clinic that gives blood transfusions or gives you physicals? Well, the truth is, it's all subject to regulation. It would be illegal for you to have a nurse license in West Virginia working in a clinic in Virginia, unless I changed line item on page 147. Now the problem is there are millions of pages of regulations. So there are millions of pages of regulations. They're changing by every county, city, state, country and cross domicile and for every use case all the time. And it's hard to comply with them. It's even harder to know you're complying with them. And even if you thought you were complying with them, it's always possible for one of your disgruntled employees or competitors to arrange for it to look like you're not complying with them. And so this becomes a challenge. For example, I operate a bar, you operate a bar, I don't like you. And so I just arrange for a bunch of underage people to come into your bar and order a drink. And then I call the Bureau of Alcohol Tobacco Enforcement and I have them hang out at your bar and they notice that you're breaking a rule. It's just like drug cartels notoriously when they call and they give hints to law enforcement, they're ratting out their competitor. So actually what you end up in a regulatory environment is one competitor rats out another competitor and that's part of regulatory risk. And then maybe I just lean on it a little bit to actually cause you to break the rule. What if I even plant an employee into your employee and your facility to cut corners? Nobody ever shuts down a billion dollar factory for breaking a rule and says, oh, it was this employee that did it. The corporation is liable for the behavior of 100,000 employees. So regulations are hard.
10. And that takes me to employee risk. Right? You have a lot of employees, right? Employees have foibles. Maybe the employee shows up to work drunk or maybe they show up high and then they say something they shouldn't have said, okay, I get in an elevator, I'm drunk and I'm high and I'm your employee and now you're liable. So you have examples where like the billion dollar Tesla lawsuit where Tesla is getting sued because of something one of their employees said in an elevator to some other employee. And so you run a company. Actually, when you're a shareholder and the company has a million employees, you could say, this is great. I have a million employees working for me. But if you thought about it, you realize this is interesting. I have a million employees and I am legally liable, civilly liable or criminally liable for everything and anything any of them might do at any time. One of your employees in a foreign jurisdiction can break the Foreign Corrupt Practices Act. And then you as a shareholder are civilly liable. You might not be criminally liable, but you're actually going to lose all your money, right? When they get shut down because someone that worked for the company did something inappropriate. So I had employees, so the employees want to go on a business trip. The company pays for them to rent a car. So they take the car out and they go out drinking and then they drive the car into a wall and they wreck the rental car. You're liable. The company is liable, right? It's company rental car. They're company employees. They're on a company business trip. So whatever your employees do in the pursuit of company business, you're almost always civilly liable. You're financially liable when they wreck the car. You're civilly liable if they hit a station wagon with a family in it and the family suffers and then they sue you. And you might be somewhat criminally liable if they actually attempt to influence a foreign official or they break some kind of bright line that has criminal liability, which bubbles up to the company. So more employees, more risk. If you had a company without employees, that would be better, right? Because if there are no employees, for example, in Bitcoin, since there is no employee of Bitcoin, there's no one to take the company rental car and drive it off a cliff or take an innocent civilian in the car and drive it off a cliff. So having no facilities and having, you know, technically, if you own Bitcoin, you don't own any facilities. You don't have any employees. There is no board of directors, right? And ironically, the technology risk isn't really that much of a risk because the product of Bitcoin is to serve as global money forever. So if what you wanted to hold was 121 millionth of all the economic energy in the human race for the next million years, that idea is not going to change for a million years. I'm still wanting to hold 121 millionth of all the energy in the human race forever, whereas the idea behind the iPhone changes every year. And the idea behind, you know, it was Coca-Cola, then it was Diet Coke, then it was New Coke, then it's Coke Zero, then it's Coke Cherry Vanilla Coke, then it's, you know, Coke Cream Show to Coke, then it's, you know, whatever, Coke. They keep changing the idea, right? And that's the difference between having a complicated product or service idea and just having a monetary idea.
You know, after employees, we've got vendor risk. You know, the classic chart is, you know, Michael Porter had this chart. It's like, well, you've got your customer risk, you've got your competitor risk, you've got your not-in-kind competitor risk, and you got your vendor risk, you know, and he articulated those four competitive forces. Now, the truth is the four was the four politically correct forces. There's a lot more forces that are diluting the shareholders in those four, but clearly one of them is vendors. I run a Bitcoin mining rig, and then my electricity provider doubles the cost of electricity. Oops. You know, I run a restaurant, and then my potato, you know, provider doubles the cost of potatoes. I run a steel refinery, and ore doubles in price. You know, I use electricity or I use oil, and the cost of oil doubled, you know, in my plastic. So generally, when you look at companies, in terms of who's senior in the capital structure, you know, the way you think of it is common stock equity holders are junior. They take the first losses. Then the preferred equity holders are senior to them because they keep their value after the common stock loses all its value. Then the junior creditors that hold junior unsecured debt are kind of senior to the preferred shareholders. And then the, you know, sometimes secured creditors or senior creditors are senior to them. And then there are certain asset-backed lenders that they have the ability to claim their assets back in the event of default and the assets might have some value. So they're a little bit senior. And then you get down to like, you know, more senior in the capital structure would be like landlords. If they have the ability to evict you from your facility, that's good, but really senior to them are the utility vendors. The company that provides you with your telephone service, your electricity. If you're like a Wall Street broker and the phone company can turn off your phone, that's senior to the real estate landlord. And it's definitely senior to all the creditors and all the equity holders because, you know, the phone company can turn your business off in five minutes, no recourse or no recourse at all, right? You're just out of business. And the power company can shut off your power and they shut down all your computer servers and you're just out of business immediately. So electricity and telecommunications are much senior to everything else. And then of course, if you manufacture tires and you need petrochemicals, you know, you need rubber, right? Or if you're running a restaurant and you need food, when the vendor of your food or your raw materials cuts you off, you're just completely utterly out of business. So they can renegotiate those contracts whenever they want at will. And if you got in a fight, if you say, no, I have a 10-year contract for my telecommunications and the contract says you're not allowed to turn off my telephone. Well, if the telephone company has a monopoly and they say, well, just sue us and they turn you off anyway, you're not going to last 10 years in court. Your business goes to zero. You have no money to pay your lawyers. You're not going to be able to sue them. It's kind of like I sell you your oxygen. Okay. So when I sell you your oxygen and I jack the price by a factor of a hundred and you refuse to pay it, well, you've got about 180 seconds before your legal appeal runs out. So vendor risk is tangible and very sophisticated companies. They always think, first of all, I need these ironclad contracts, but there's always a question of is the contract durable and enforceable? And will I be dead as a going concern before the contract is enforced? And if you're going to be dead, for example, if Apple is going to cut you off from the iStore and you're running a mobile app and without the mobile app being downloadable, you'll be dead in 12 months or 24 months. You can't afford a five-year litigation with Apple. So ultimately, the only way to protect yourself in that case is you have to find three or four competing vendors and you need to be able to switch between them quickly. Now that's, I mean, that's well and fine in theory, right? Like I need three vendors of natural gas, but there's only one pipeline that runs to my facility or I need three vendors of crude oil or any three vendors of electricity, but there's only one or two vendors of electricity in the city. Okay. So what happens when there's only Apple and Google and I want three, but there's only two and they actually have the same terms? Well, now I just have an impossible to manage risk. And that's why say Bitcoin is superior to a company with vendor risk because Bitcoin actually has lots of ways to mitigate that risk. And you always have to be considering that, right? That's why you would want to have a hundred different jurisdictions where you can mine Bitcoin. And as long as a Bitcoin miner can run for five to 10 years, you know, that'll be five to 10 years after your vendor cuts you off before you have a problem. And in seven years, now you go to a different Bitcoin hardware manufacturer. If every Bitcoin hardware manufacturer goes bad on you, you have seven years to figure out how to engineer your own semiconductors before you have to think about the theoretical dwindling of the hash rate. So how much time do you have to deal with the vendor breakdown, right? Will your electricity company cut you off or double the price? Of course they will. So that's a problem if your business is creating hash rate. But if your business is holding Bitcoin, it's not a problem because even though the electricity company may actually squeeze the Bitcoin miner, all that means is you can bankrupt the Bitcoin miner. And then the electricity company takes over all the Bitcoin mining rigs and they operate the Bitcoin miners as a benefit to Bitcoin holders, you see. Ultimately, you know, I could be the Chinese government and I bankrupt 50X a hash worth of hash rate. Eventually the Chinese government will realize they should just take those rigs and operate them themselves because they want the money. But if they don't, then the hash power moves to Kazakhstan or some other part of the world where it gets operated by another company. And if the power company bankrupts that company, then eventually a Kazakh power company owns it. And if they don't want to operate it, well, they could just burn it. But if it's worth something, why wouldn't they sell it to some other power company in some other part of the world that has free power? So the vendor risk that exists when you manufacture a product that is not money, that is not decentralized, it doesn't exist the same way for Bitcoin.
So then that takes you to customer risk, right? That's risk factor number 12. Customer risk. Well, maybe your customers stop buying your Coca-Cola or maybe they stop vaping or buying your cigarettes or maybe they stop buying. The best example would be the customers don't want to buy 8-track cassettes or 8-track tapes or they don't want to buy DVDs anymore or they don't want to buy horse and buggies anymore or biplanes or whatever you thought was a good business. They don't want to buy it anymore. The other risk, that's sort of technical risk, but I guess the other part of customer risk, which a classical competitive theorist would refer to, is the risk that your customer gets too powerful. So maybe I'm in the middle of the market and I'm a wholesale food dealer and there's one company which becomes 40% of all of my business, right? Or maybe I'm Qualcomm and I sell smartphone chips and Apple becomes 50% of my revenues. And then what happens is my customer starts to squeeze me. They ratchet down the price like, since I'm half of your business, I want a deep discount. Walmart used to be that. When Walmart gets to be such a large portion of your business, they squeeze your prices down until you're shipping to Walmart at cost or below cost. There are a lot of companies that would actually sell their product at a loss to the mega retailer in order to build their brand so they could make money in another part of the marketplace. And so you can end up with that situation. It's like we don't make any money off of the product we sell through the monster distribution channel, like the Apple channel, the Walmart channel, but we do it because we want to stay in business. So when your customer is a distributor, they get too powerful. They may squeeze your margins to zero. The other problem is Amazon's my customer and they look at what I'm selling. Maybe I'm selling batteries through Amazon and they decide to white label the batteries. Now you've got Amazon batteries, or you've got Amazon t-shirts, or you've got Amazon branded extension cords, Amazon light bulbs, or Walmart. All of these big players, Target, Walmart, Amazon, eventually they do this thing where Sears, Roebuck, they would create their own variety of product. Because they actually see it's a big business and they call it control distribution. Apple and Microsoft and Google do the same thing where you have a successful product, Spotify, and eventually you get Amazon music and you get Apple music and you get Google YouTube music. Because the idea of streaming music was deemed to be a good thing. And so that gets harder because they brand it, but then they build it into the operating system. And now it's built into the iPhone and built into the iOS. So your customers eventually end up squeezing you one way or the other, if they're also corporate entities. Maybe they're government providers, maybe they're government customers. So the government's buying your product. Maybe at some point if they're a friendly government, then they basically pay you a lot of money and that's good. The company has to support the politicians who then support the company. And then it becomes very lucrative, like military industrial complex or iron triangle where the government supports the vendor. That's the good case. The bad case is it's a hostile government and they're your big customers. So they drive the prices to zero, or they pass a law saying you have to sell to them at cost and they strip your patents from you. So customer risk is always there. So you have to sell your product at cost. Customer risk is always there. That takes us to risk 13.
Risk 13 is reputational risk. You have a CEO. The CEO is a brilliant CEO, but it turns out in college the CEO wrote a thesis on why it was cool to smoke weed. And today the CEO is maybe running a ketchup factory in a state where the governor doesn't like smoking weed and so the CEO becomes a target. So the board of directors is great, but somebody on the board of directors goes to a bad divorce. And in the divorce a lot of embarrassing facts come out and that becomes embarrassing for the company because it turns out that the director that has the bad divorce approved the compensation plan of the CEO and now there's a question of whether they were compromised. So as long as there are people that govern the company, the people have a history. Maybe one of the officers or directors of the company campaigns for the opposition party or the leading party and they're politically embarrassing. So the reputation of the company can be impaired through some activity. The head of your business in a country in South America got in a scandal and that rubbed off on you. So maybe that happens, maybe a director or officer has a reputation, maybe any employee that's famous. The Kanye West episode with Adidas where your spokesperson that's selling a billion dollars worth of your tennis shoes gets in an unrelated scandal having nothing to do with tennis shoes. But ultimately Adidas loses money, the Adidas shareholders lose money. That's just an example of reputational risk and it's unavoidable.
Risk 14 would be war risk. Maybe you get in a war, maybe you manufacture in a war zone like you manufacture in the Ukraine or maybe you sell into a country which gets into a war or maybe you have to ship your products through the Black Sea while there is a war. And during the war, if you're lucky maybe you're a war provider and you get rich off the war but maybe we know the story of say DuPont Corporation sells explosives during a war and they get big but how about all the companies that sell, how about recreational cruises in the Atlantic during World War I? It didn't help them. So everyone that operated a luxury hotel in the south of France during World War I and World War II didn't help them. So the war can destroy your business with no sympathy. Famous example in the south of France, one of the most beautiful hotels in the south of France. A guy slaved his entire life to create his own hotel. He always dreamed about it and he built, might have been the hotel Majestic but I don't remember exactly, but he built the greatest hotel in the south of France. He borrowed up to the hilt to do it. It was the jewel of the French Riviera and he brought it online in the late days of like 1913, 1914. The war breaks out, the entire tourism business gets shut down and the government seizes the hotel and turns it into a military hospital and for the next four years it uses a hospital. You can imagine pretty much half of all the capital will be destroyed if you turned a luxury hotel into a hospital. It gets returned to the shareholders after the war but of course they've been bankrupt. The guy that started was bankrupt. He died destitute. That was that. Oops. It's a tragic story but for so many different reasons. No one's going to actually, no one's going to grieve for the guy because it's like, who are you? You wanted to run a luxury hotel and we had greater more important things on our hands. People feel sorry about someone that died in the war, rightly so, but every business that got economically wiped out in a war is just collateral damage and that accounts for a lot like maybe 98% of the businesses in Europe during World War II wiped out.
Then we go to 15, our favorite. You operate a corporation, you're an equity holder, you have currency risk. You can't avoid it. In South America, you have exposure. Currency is the lifeblood of the corporation. You can't do business without trading in the currency. It's the medium of exchange and so every currency in South America collapses every 20 to 30 years and every currency in Africa is continually lapsing. The CFA is lapsing at 20, 30, 40% a year. Whatever currency is the native currency in the market where you operate is a drain on the equity of the shareholders. My company has the leading business intelligence company in Argentina for the past 25 years but the Argentine currency, the peso, has been losing value at 20, 30, 40% a year, just lapsing value from one peso to the dollar to 370 pesos to the dollar. How do you extract profit from a marketplace when you're accumulating the currency that's collapsing, especially since collapsing currencies always come with capital controls? The most successful currency in the last 100 years is the US dollar. The US dollar, as I've established, it collapsed 99.7% against Miami Beach real estate over 92 years, 99.7%. The house that I am in went from $100,000 in value to $46 million in value over 92 years. It works out to 7% a year for 92 years. We are on track for it to be $100 million by the centennial. We will literally be a 99.9% lapse in value over 100 years of the strongest currency of the 20th century. The winner of every war and the world reserve currency loses 99.9% of its value over 100 years. Everything else is worse. I don't know how you measure worse, but it means practically speaking, 98% of all currencies lose 100% of their value over the 100 years and most in 20 years. The problem with currency risk is what it means is a company can't run with positive working capital. You have to run with negative working capital. It means that accumulating billions of dollars of profit means that you have $10 billion that's losing 20% of its economic power in a bad year and 10% in a good year and 30% in a horrific year. You're continually lapsing energy into the economy. That currency risk causes corporations to do irrational things. One thing you do is you borrow tens of billions of dollars. You borrow tons of money. You go into debt. The other thing is you don't accumulate asset. You don't accumulate equity. The other thing you do is you pursue a strategy of acquisitions. The reason all my competitors went out of business is they realized that they can't grow the core business 7% or 8% a year. The conventional wisdom is if the currency is losing 7% of its value a year, you have to grow your revenues 10% or your cash flows 10% for the equity to hold any value. But almost no businesses can be grown at 10% a year. You could say, well, don't Google and Apple grow at 10% a year? Well, Apple, no. Google, not right now. But the 0.1% of the businesses that do grow 10% a year are the ones you read about 99% of the time. So you have an adverse selection in the media where what you read about is you read about Apple and Google, which are the greatest digital monopolies in our lifetime that grew well for a while and they wiped out 99.9% of their competition. Everybody else gets wiped out. The average business can't grow 10% a year. So when the currency is grown at 7% a year in the US, when the currency has grown at 14% a year in the developing world, that means that a company in the developing world has to grow its revenues 20% a year in that currency, or they have to grow their revenues 10% a year in the US dollar. And you can't do that. So what you do is you lever up by borrowing a ton of money and buying your stock back and you're running on no equity. And that way you have no asset, you de-capitalize the company. And that increases the risk exponentially. Every company you read about that went through an LBO and then they couldn't make their debt service payments, you know, go and Google companies that fail because they couldn't meet debt service. You'll find thousands and thousands and thousands of companies, they couldn't meet their debt service. They were wiped out because they kept taking on debt to create equity value. And that's one problem. And then the other problem is I decide I'm going to grow the top line by buying another company. So I do a merger of equals, Microsoft is buying Activision, you know, Salesforce buys Slack, Salesforce buys Tableau. These companies buy other companies at a multiple of four times revenue, eight times revenue, 10 times revenue. Okay. Why would you do that? Well, because you've got to keep the revenue growing and the top line growing and you avail yourself of acquisition accounting. And that's a way to protect equity value. The Time Warner AOL deal, it actually worked for the shareholders for about 12 to 24 months during which they all got liquid, they sold, and then it collapsed and everybody lost everything. So this currency risk is driving all this other pernicious behavior. And it has another effect. We'll talk about when I finished this, it's what destroys the diversification strategies and the indexing strategies. But we'll come back to that in a bit.
16 is tax risk. And tax risk is, you know, you do business, you've got the risk of being taxed by a city, taxed by a state, taxed by a county, taxed by a country. And the taxes can vary, but when someone decides they don't like whatever you're selling, they put a windfall profits tax on you, or they put a withholding tax on you, or they put a value and use tax on you. And they just tax you out of existence. And it's very difficult to deal with that. And over a hundred years, that's going to change all the time.
17 is weather risk. You know, you've got a business, you won restaurants, and when the weather is bad, people don't go out. You have open air amphitheaters when the weather is bad, they don't go out, right? Weather is a huge driver of business, and there's no way to control it. If you're lucky, it's just routine cyclical weather. If you're unlucky, it's a tsunami, and it wipes out your entire resort, and you lose five years of profit. And that's it. Wipes out your entire resort, and you lose five years of profit, right? Or you lose all your capital. So weather risk affects lots of businesses. Many of them don't even realize they're affected by it.
18 is customs risk. That is all of the cross-border trading taxes that are being put in place. A lot of companies in China got wiped out by customs that were put on them, but you've got North American free trade agreement, which isn't free trade agreement that wipes out half the businesses, the benefit of other half the businesses. So this customs technique is being used as a weapon of political policy and economic policy. And the challenge there is your competitor may decide to influence a politician to create a customs rule that wipes you out and helps them. So people just wage economic war through politicians via customs and duties, and it's continually going on, everybody at war with everybody. The problem, of course, is I can take a million dollars and I can use it to influence a politician to create a billion dollar penalty for my competitor. So it's extremely unfair, and it's sort of unethical. It's unethical and it's unfair, but it's also uneconomic because someone destroys a billion dollars of value with a million dollars. It's kind of like if I had the legal right to take a bullet and put it in your head and shoot you, well, everybody's shooting everybody. If I run a healthcare clinic and I just go and I can machine gun down all the doctors in the competing healthcare clinic, well, a thousand doctors are dead and they collectively took 20 years of their life or 30 years of their life to become doctors. So I wiped out 3000 years worth of medical training and I deprived my city of half of its healthcare, but I made a lot of money doing it. So you're creating economic carnage through this customs process. I'm destroying, I'm wiping out a billion dollar plant in the wrong country. Just like what's going on right now in semiconductors. I have a plant which will manufacture semiconductors, not in the U.S. So what I do is I wipe that out and force you to rebuild the plant in the U.S. using a customs duty. And it's just creating it's just creating economic carnage and somehow if I passed a rule, basically doubling customs duties on everything that was foreign, I wipe out half of the capital value of everything in the world overnight with a brush of a pen or a keystroke. I double the price of everything. I wipe out the equity capital of everybody that's an equity investor in all those factories. I should pause here and make a point on equity, which is people think that there will always be value in equity, but there's no reason why equity has to be worth anything. If the government, if public policy is sufficiently critical or hostile to equity holders, I can drive the value of every piece of equity and all corporate ownership to zero in a country. I'll give you a simple example of that in North Korea or in Cuba. If I literally outlaw private ownership, the value of equity all goes to zero. But you can also conceptualize in a free market economy where the policies are so hostile to equity holders that all of the value goes to senior debt holders, where it goes to the creditors. Maybe the people that own the debt in the company actually maintain their capital, but the people that hold the equity get driven to zero. In a bankruptcy, that happens. In a bankruptcy, you can see a billion dollars of equity goes to zero, but a billion dollars of debt maybe actually trade sideways as a billion dollars of debt, it gets recapitalized. There's no guarantee that equity is ever worth anything. When you start to see increased government intervention, it typically works to the detriment of the unsecured creditors or the equity holders. It may or may not impact the secured creditors and sometimes has no effect on the vendors or the utility creditors, the people that are selling the electricity. They might benefit from it. That's 18, customs risk.
19 is legal risk. Every company, because it acts, because it does things, it takes on legal risk. Maybe it produces a product which is non-compliant. Maybe the people in the factory do something which is non-compliant. Maybe there's a law that says that you're not allowed to show up to work without a mask. Maybe there's a law that says that you have to have a certain license. There's millions of pages of laws. Maybe the guy that runs your restaurant fires the wrong person and they take offense. Maybe when he fires them, he uses a cuss word or a swear word. He swears at them and he's rude to them. They sue and there's a trial by jury and then you lose a $700 million lawsuit. You take on civil liability because of the behavior of your employees and it could be civil. It could be criminal. It's never a defense that the company can't say, well, that person just worked for us. If you're the shareholder, you can't say that's just the employee. The employee has the power to bind the company contractually but also if the employee is driving a truck with your brand on it and they drive it into a school bus, you have the civil liability and maybe if the employee operates a candy bar factory and they don't actually abide by the right healthcare standards or they do, maybe they ship a candy bar and it kills somebody, you might have a criminal liability. Ultimately, civil and criminal liabilities accrue to the equity holder. You can't avoid that and that takes me to a special type of legal risk.
This is risk factor 20, tort risk. Tort risk is you're doing anything that anybody doesn't like so they just sue you. You've got all the time. All the time you have this tort risk. It's like you manufactured a car and it was rear-ended and exploded so I sue you. You manufacture a car without a seatbelt and I die because I go through the windshield and I sue you. You manufacture a car without something. All the time, any kind of product fails or doesn't work as I expected it to work, so you get sued. Class action lawsuits, all kinds of lawsuits, derivative lawsuits. You took a risk we didn't want you to take so we sue you. You took a risk, you disclosed it in the wrong way. The reason that the 10Ks have so many pages of potential risks is because the attorneys are attempting to disclose every possible risk factor, any way that the shareholders might lose money because they anticipate in five to 10 years, someone's going to sue the company. By the way, the company can make 100X its gain and you can still get sued. Everything works perfectly and then it trades down 27% and then someone still sues you. When they sue you, they will say, well, management team acted irresponsibly and we didn't know. The attorneys want to be able to say, well, in this paragraph of the 10K, we disclose that it's possible that a hostile government would take this action against us. It's possible, we rely upon management as possible. Tort risk is always with us and you read about all these horror stories, like a company can get a billion dollar legal judgment against them, like such and such. Restaurant manager yelled at customer and customer sued, said their civil rights were violated and $350 million lawsuit. Okay. What the heck, it happens. That's risk factor 20.
21, patent risk. You create a product and the product uses words on a computer screen and occasionally when something goes negative, the words flash in red and someone sues you and said, I have a patent for the use of red flashing numbers on a computer screen. You use a button and someone says, I have a patent for the use of buttons on computers. Then you actually make it possible to send people monthly reports via email and someone sues you and says, I have a patent on using email to update customers on status. Then you create some other product and the product uses an orange heart and someone says, I have a patent on icons with the color orange in them. You would be shocked at how many random patents are. Everybody tries to patent everything. I think that at one point, someone was suing BlackBerry because they were using electronic devices to send email back and forth. Everybody thinks they invented everything. The sad fact of the matter is there's this bias. The entire idea of patents is, I came up with the original idea and so I should be paid for it. I think it's kind of a fiction. If you trace the history, you said, what's the oldest known factory? They can find a stone axe factory from 1.7 million years ago and they found like 500 stone axes, 1.7 million years ago. They found like 500 stone axes, 1.7 million years old. What it tells you in a blink of an eye is, 1.7 million years ago, there's an economy where people created a factory. They manufactured stone axes. They had some form of money. They traded it for furniture and for food because nobody needs 500 stone axes for themselves. They probably had rules around it and they probably had a medium of exchange and they had warehouses and they probably kept score. There was probably fabrics and if you could do stone axes, you can have clothing and you can have shelter and you can have food and you can have storage and you can have logistics and carts and all these things. But the thing is, after 1.7 million years, the only thing we have left is the stone axes because they're the only thing hard enough to last 1.7 million years. Everything else decayed. Nothing else lasts. So, we have to reinvent that stuff every 10,000 years for 1.7 million years. But somehow or other, humans think that recorded history is the only time that we invented stuff. And so, we start attributing people with the idea starting 4,000 years ago or 300 years ago. 300 years ago, you had the idea for a printing press 300 years ago. Well, maybe, but maybe like 200,000 years ago, a dude created a seal out of mud and he was printing stuff out of wood but he got murdered by someone from the other valley and that got burned and we just don't remember him anymore. So, patents are just this idea that I can invent stuff and I can prevent you from using it. And ultimately, everybody's always trying to patent random. The use of arithmetic in displays something silly but Lord help you. If you run a company, you will be sued and there are patent trolls and the patent trolls will basically sue everybody for use of words and numbers and computers to do anything even though it's pretty self-evident. Most of these ideas get invented 10,000 times. It's not that anybody could invent the idea but like one out of 100,000 people can pretty much reinvent whatever anybody else invented. And the question is, do you have the right to reinvent it or invent it or do you have not the right to invent it? And this is a problem for shareholders because the shareholders are getting continuously sued and you know, Nick, you know why big companies accumulate patent portfolios? The number one reason why is we all know we're going to get sued and so when we get sued, our strategy is to counter sue each other to say, okay, well you have a patent on the use of the color blue and I have a patent on the use of the color orange and so what if we cross license and you're allowed to use blue and orange and I can use orange and blue and we can go about our business and generally that's how it gets settled. The danger is the trolls and the trolls are these parasitic lawyers and they don't produce anything and the reason they don't produce anything is if they produce anything, they could be counter sued. So they just have portfolios of patents and they just go about suing everybody for everything everywhere because they just object to someone being able to use arithmetic in their computer program and ultimately they leave a small entrepreneur with the cost of spending 10 million dollars to defend the use of arithmetic in a computer program and their idea is there'll be a parasite and you'll give them some of your money and if you get sued by 100 patent trolls and you give them each 1% of your revenues, then you've got nothing left and so they just are parasites just like a tapeworm and there's 100 parasites. If they all got 1% of your consumption, you're dead and so do healthy organisms die by a parasite? Yeah, they're fungus, they're bacteria, they're viruses, they're parasites and they continue and it's awful for the human race and for productivity but first they will basically sue everybody, then they will pay the politicians to pass laws to protect the tort lobby and the tort trolls and that's life and the patent trolls.
So it takes me to 22, risk factor 22, health risk. These companies are operated by human beings, just like your body has cells, your body is replacing your cells every 90 days. You have to but imagine if the cells continue on. When the cells cling, then the cells become cancerous and that's eventually when the body can't replace your cells, then you age, you become less flexible and eventually you die and that is the life cycle of an organic being. In a corporation, the problem is when the CEO is 45, okay, what about 55, what about 65, what about 75, what about 85? Do you really want a 95 year old CEO? I mean at some point as the officers and the directors age and as the employees age, they become fragile and they don't learn so well. People, they don't learn so well. People that are 85 years old don't learn the same things that people that are 25 years old learn. So there's a life cycle. As you age, you have health problems, you might have heart problems, you might have metabolic diseases, you might have all sorts of issues. You get kind of distracted by your own mortality, right? And if you're lying in the hospital after your second heart attack, it's more difficult for you to take a long-term view towards your corporation. You're thinking about other things. At the very least, you're distracted, right? If you're not distracted by your own personal problems, you're distracted when they administer all the painkillers and then they administer the benzodiazepams and the mood alter, the mood leveling drugs that they give to people that had cardiovascular surgery. So as officers and directors and employees in these corporations age, you have all sorts of health risk. And it's just like that. It's a risk, right? Is it 99% likely you can do your job? Sure. But if you're flying an airplane, how do you feel about an airplane when the guy flying the airplane has had three heart attacks and he's 75 years old and he's on 14 different medications? I can tell you how you feel. Yeah, you probably won't get cleared for flight, right? That would be politically incorrect if I said that about certain other professions. But if you're going to be a bus driver for elementary school kids who are going to fly an airplane, do you really want your heart surgeon to go into your heart surgery and they're on 17 medications? Maybe not. So at some point, corporations have to deal with that health risk. And of course, as they're dealing with a health risk, if they actually fire someone or replace them because of those health issues, they get sued by the tort lawyers or the regulators. You're insensitive, you know? Our country is run by octogenarians, right? You notice? And there's a lot of interesting, colorful back and forth over whether it's good for countries to be run by octogenarians. When the Soviet Union was run by octogenarians, we objected to that, right? It creates interesting existential crises.
And that takes us to this life cycle risk, 23. Everybody has life cycles, right? So when you're 25 years old and you're single, you have a different view of the world and when you're 85 years old and you're going through your fourth divorce, and you have children and grandchildren and you own half the company and they're fighting over the company and you have dynastic struggles, right? You actually have all these corporate governance issues and you have all these risks to equity holders. This famously happened in the Sumner Redstone Viacom case where Sumner Redstone was controlling shareholder and he had a fight with his daughter. And in the middle of it was the CEOs of the companies he controlled and then all the shareholders, right? And their view was we're being abused in this dynastic power struggle. There are lots of other examples that I could go into. Life cycle risk is a challenge. It doesn't occur if the company was run by an immortal creature that lived a million years, and that's what Bitcoin is. You don't have a life cycle risk because there is no life cycle, right? Satoshi's protocol isn't going to die and it doesn't have children and Satoshi isn't around to have an opinion and there's no bad divorce coming, right? And so you're not going to have these issues. These things happen with other companies all the time.
And the result of these first 23 risks, they just drive one last thing, which is dilution risk. Ultimately, you're an equity holder. And the way the companies deal with all these other risks is whenever they fail to manage one of the first 23 risks, they just issue more stock or they dilute the shareholders. And there's a good reason to issue a stock. If you're issuing a stock creatively and you're acquiring assets that are more valuable than the stock you're issuing, that's a good reason to do it. That's okay. But when you're issuing stock dilutively and you're acquiring less assets, or you're simply paying off a liability, then you're diluting out to shareholders. And over time, you get diluted either by issuance of equity or by absorbing an off balance sheet liability that catastrophically blows up at a point seven years in the future. And at that point, the equity is worth nothing or it's worth much less. So those are the 24 key risks that every company equity holder has to accept. And every director, every CEO of a company has to think about every one of those risks every minute of the day. And if you're an equity holder, you have to be thinking about them continuously and you're worrying about them all the time. You can never just buy the share of stock and put it in a safe and go to sleep for 20 years. Because any of those risks I name can wipe out 100% of your asset and all of human action is a liability working against you. Now, how do you mitigate for that? Well, I mean, you can pretty much hire a money manager that runs a mutual fund for you or a hedge fund for you. And so the money manager is attempting to mitigate that risk, but now you've got the counterparty risk of trusting the money manager and you've got to pay them 2% of all your assets every year and 20% of the gain. And if you calculate the cost of say doing a conventional hedge fund way, when you agree to a two and 20 contract, if you give a million dollars to a money manager, then statistically over a decade, they're going to get 20% of your money just through the management fee. And then because they get 20% of the upside via volatility, you calculate the typical volatility, the S&P, and you conclude that that's another 18%. So they're going to get 36% of your capital risk-free in 10 years. You've given up one third of all your money to the manager. Okay. And what do you get? You get basically 3.8% lower return than the S&P index. So if the S&P is yielding 8% a year, you get 4% a year. You're getting destroyed. They're getting one third of all your money. So that doesn't work over the course of a hundred years or even over 10 years. And most of them, 95% of these hedge funds underperformed the S&P index. So that's the problem with that. And now we just have to go to the question of, well, what about the index? Why don't, you know, maybe Michael, maybe you're right about the 24 risks of companies, but I'm really smart. I'm going to just put my money in index fund. Well, what you're missing is the index is just another mutual fund. And it's just another way to select a basket of stocks. So the S&P index is the most commonly articulated one. And the S&P is 500 stocks in, you know, in this Western market, but there's a selection bias. You're basically trusting someone, some analyst that's standard and poor to select the 500 companies and weight them. And they get to choose the algorithm for selection and weighting. And it's an arbitrary algorithm that they choose and not the 500 biggest ones. They pick the 500, the, you know, say non-financial companies. And yeah, they sort of weight them, but they're 500 companies with substantial exposure to the US dollar. So the problem is you're trusting the indexer and index has become obsolete. I'll give you an example of one, the Dow Jones index. The Dow Jones index is not representative even of a market basket of large companies anymore. It's only 25 particular companies. And most of the companies in the Dow Jones index, a hundred years ago, aren't on it anymore. They just randomly put companies on it. And it doesn't track even the broad equity market. So you've got random indexes, but here's the real big problem. Your index has adverse selection bias. So you happen to pick the index, the most successful index of the last hundred years in the most successful currency. And the index is being manipulated via closet hedonic adjustments, basically arbitrary adjustments every year. They're just randomly throwing out the losers and putting winners that they think makes sense in the index for marketing purposes. If they didn't adjust the index, you would find that 95% of the companies in the index would go bankrupt. And so you're actually choosing an indexer for the next hundred years. And that's the problem. So I suggest this thought experiment. What if you took the top 100 companies and you constructed an index in each of the top 100 countries? So you take a hundred countries, like go to Zimbabwe, and you take the top 100 companies in Zimbabwe starting 1980. And you take the top 100 companies in South Africa and the top 100 companies in Japan and in Germany and in Argentina and in Venezuela and in the US and in Britain and in France and in Norway and in Russia. So now you got your indexes. Now roll the clock back to 1900 and just check how each of those indexes performs against gold or against Miami beach real estate. And what you realize is that 99% of the indexes go to zero because every index is correlated to the currency. There is no index you can construct in South America that doesn't lose all your money in 50 years. And there's no, any index you constructed in Germany lost all of your money, nearly all of your money after World War I, you know, remember the Weimar Republic, but everything goes to zero. Then it loses all your money after World War II, right? Goes to zero. So you get wiped out twice. You get wiped out at least once in Japan, you get wiped out about three times in Russia, you get wiped out five times in Argentina. So you don't quite get wiped out if you you don't quite get wiped out if you have a politically adjusted index in the US, but it's because they're, they're manipulating, right? The CPI on the dollar and then manipulating the S&P index. And, and, and you've got one other big assumption that goes with that, which is if you put all your money in the S&P index, you assume that the S&P indexer is going to be virtuous for the next hundred years. You assume that the, that the Western, that the United States is going to be successful for a hundred years. And you assume the US dollar is going to be the dominant currency for a hundred years. And you assume that you will be able to continue to keep your assets domiciled in that economy for the next hundred years, you and your heirs. If you make all those four assumptions, then you might get something that sort of tracks, you know, a market basket of equities, but it's not clear to me. I don't think any, any serious scientist has done enough research to prove that stock picking, even index stock picking can actually outperform the collapse of the, of any currency, because every, every analysis generally has been biased in favor of the index and the currency. Just like there's no honest CPI created by any member of the existing financial establishment. Nobody will tell you that the dollar lost 99.7% of its value over 92 years. They will say it lost 95% of its value. Right. And they won't give you an honest analysis of the return of the S&P index. If it was static, if it was statically maintained and they'll say, well, of course you can't statically maintain the index. The companies come and go. Okay. Well then give me an algorithm to establish an index that is not subject to human corruption, an uncorruptible algorithm. So, you know, I think, uh, I think our time is nearing an end and I have a lot more to say on the subject, but we'd have to keep it for our future podcast.
Yeah. I could, I could give you, if you look at the history of Disney and I suggest people study the history of Disney, they're a great example of every kind of this risk. The share, I'm going to do this very fast because I don't have time. The shareholders lost a huge amount of money when, uh, when Frank Wells died in a helicopter skiing accident. The number two guy at Disney dies helicopter skiing and it creates billions of dollars of damage, an unlucky event. Uh, the CEO, Michael Eisner goes to war with their most talented executive, uh, Jeff Katzenberg, billions of dollars of damage because they couldn't get along because Wells dies in a helicopter skiing accident. Eisner has a heart attack in the hospital. You know, he forms a relationship with Michael Ovitz and brings in a new president who isn't successful and isn't suited. Billions of dollars of damage is done. Ovitz goes on and, and makes a lot of decisions was create billions of dollars of more damage. You know, Eisner fires Ovitz, billions of dollars of more damage. Uh, Disney is threatened by Pixar and computer animation technology. And so they have to do a deal with Pixar and then Eisner gets in a war with Steve Jobs, billions of dollars of damage in that war. Eisner is fired, billions of dollars of damage. Iger is elevated and he, and he actually goes and does some pretty, uh, expensive acquisitions. Lucas aquiring, you know, acquiring, uh, Lucas films, acquiring Pixar, but then that sort of works. And then Iger retires life cycle issue. Bob Chapek takes over. They're faced with the existential threat of streaming video. They started investing huge amounts of money in streaming video, billions of dollars to cost. Chapek, you know, goes through COVID and COVID during COVID, the cruise lines that diversified into get shut down. Disney cruises, disaster, Disney hotels, shut down a disaster. Disney theme parks, shut down a disaster. Then human resources issues pop up and Chapek gets in a big fight with Ron DeSantis over, over Republican cultural, you know, politics, billion dollar disaster. Iger decides he wants the job back. They fired Chapek, billion dollar disaster. Now, Bob Iger is back at age 72, outside shareholder activists, sues the board. This is just one example of carnage and anxiety after another for 25 years. And this is like the successful company. And this is kind of the life of the equity shareholder, just living in anxiety. And every other company has the same story and they will continue.
So I guess I would summarize with this. On one, you know, you know, there's the famous St. Zupary quote, right? The design is perfect when there's nothing left to take away. If I take a company and a product, I take away the product, I take away the board of directors, I take away the CEO, I take away the facility, I take away the Nexus, I take away the brand, I take away the employees, I take away all the trading, I take away all the motion, I take away the competitors, I take away all the new ideas, I take away all of the uncertainty and the volatility. I take away the human factors and the lifecycle. I take away the life and the death I take away the life and the death and the aging. I take away the drama. What have I got left? I got Bitcoin. Bitcoin is a company where I stripped away 24 different risks. You want to ruin Bitcoin? Every time you want to come up with a new idea, let's change the protocol. Let's do this. Let's do that. Let's make it better. You get Ethereum. Ethereum is, I got all these new ideas. They have 10 years worth of new ideas on the roadmap. They have new ideas all the time. This idea, that idea. If you want to destroy, if you want to convert your commodity, which is money into an equity, which is technology, you keep injecting new ideas. And the arrogance of humanity is human beings are born thinking that they're bulletproof and indestructible. And for whatever reason, we're all so arrogant. 1.7 million years ago, somebody figured out how to run a stone axe factory. And I bet you, everybody listening to this podcast, if I dropped them in the middle of the wilderness, they couldn't figure out how to manufacture stone axes and set up a factory and turn out 500 a month. They'd probably all die of starvation. Yet 1.7 million years ago, people figured it out. They created an economy. They invented all this stuff. And the human race keeps inventing and forgetting and inventing and forgetting and inventing and they rise to a certain level. So every new generation, age 18 or 22 or 25, they think that they're going to do it better. And therefore, they want to, I could run that company better. I could build that product better. If I was in charge of the city, I could run it better. If I was in charge of the economy, if I ran the football league, if I invented the new game, if I invented a new product, if I was in charge of marketing, everybody thinks they could do it better. And what they don't realize is they have this inventor bias because they invented it. It's their idea. They think it's beautiful and it's a million times better than any other idea. And they have an ignorance. They don't understand all of the ways that it won't be better when it gets introduced. So a corporation, when you're a corporate shareholder, you think by owning a company, you will have something which will outperform Bitcoin. You're going to outperform perfect money. Perfect money. And the only way to outperform perfect money is you have to outrun, you have to manage all of the risks I mentioned and outrun the currency debasement rate. You have to manage every single risk and grow more than 7% a year in your working capital. And that's how you outperform perfect money. And maybe all these things worked better in the past because we never had perfect money, right? Because people thought I'm trying to outperform T-bills, right? I can't use gold as a medium of exchange. I can't have gold running through my veins. If I had gold running through my corporate veins, then my money has a half-life of 35 years, right? The energy in my working capital lasts 35 years if I have gold running through my veins. But if I have the US dollar running through my veins, my money has a half-life of 5 to 10 years, let's say. So in that particular case, it was a different thing. But now you could have Bitcoin as your currency, store of value, medium exchange, and as a half-life of infinity. So what that says theoretically is you should probably be doing a lot less with your working capital and you should be saving a lot more. That's another way of getting to this idea that in a fiat world where the currency is collapsing, you have to buy and do anything with your money because the currency is going to zero in a hurry, right? You live in Zimbabwe, you'll buy stacks of soap and toilet paper and anything that's tangible and do anything because you might as well spend it on food, eat, drink, be merry for tomorrow we die, right? So in an economy like that, all of the economic energy goes toward consumption, dissipation, or even production or experimentation in the near term. But in an economy where you have perfect money or properly engineered money, you really start to say, well, the risk of doing all this other stuff is so high, I shouldn't do it. As an individual, you shouldn't have so much allocated to equity, right? You should be shifting your portfolio away from things that have a theoretical return of 7% or 5%. It ought to have a theoretical return of 20% and there aren't many things that have a theoretical return of 20%. So you should shift away your capital back to strong money because Bitcoin is this risk-free return over the long term. And that causes the individual to be a saver. If you're an investor, it means that institutional investors should shift their capital allocations away from equity and you shift toward a stronger money. And if you're a corporate executive, instead of doing a billion dollar acquisition, you would just keep the billion dollars and keep it in your treasury, right? MicroStrategy doesn't have to invest a billion dollars in buying another business intelligence company because we have a billion dollars on our balance sheet in Bitcoin, right? Or billions. So we can simply hold the Bitcoin and get a yield and a return for our shareholders over the long term. So the way that you think is going to change, and ultimately, I think that as people understand the risk factors embedded in equity, then the consumer, the family, the individual investor, the family, the institutional investor, the sovereign wealth fund, and the corporate treasurer, and the institutional, the institution, the agency, all of them will change their view and their allocation because it is much less rational to be using equity and equity indexes as a store of value when you have an alternative, which is properly engineered. One could argue that, you know, gold wasn't fast enough and it lost favor as money. And so people all migrated, for a while, they migrated to sovereign debt as a store of value. And that makes sense. Sovereign debt is a store of value when the interest rates are seven or eight or 9% and the inflation rate, the monetary inflation rate is 7%. It's not a great idea. I mean, it's, it basically is a parity store of value, right? A great store of value yields 14% against a 7% inflation rate. A good store of value yields 7% against a 7% inflation rate. A crappy store of value yields 3% against a 7% inflation rate. When that happens, everyone stampedes to the S&P index or ETFs or equity indexes or just raw equity. And that's what's happened in our economy in the past decade. And I think the world's rational. As people get educated, they will gradually reallocate their portfolios. And I would say right now, clearly, the world is over-educated and over-marketed in equities, right? We have much, much more of the financial education infrastructure allocated to educating people on equity and ETFs and mutual funds. I just went to a conference. I walked through an entire conference and they're like, there's thousands and thousands and thousands of expensive, sophisticated financial professionals in suits that are explaining to you one of their 8,000 mutual funds or ETFs or something. So the world is over-educated in that. And the world is under-educated in sound money and Bitcoin. Because the economics are such that if you look at all the crypto funds, they wouldn't even hold Bitcoin because they don't get 2 in 20. You don't get 2 in 20. You don't get 2 in 20. You don't get 2 in 20. You don't get 35% of the capital you raise if you invested in Bitcoin. You couldn't justify charging 2% management fee and a 20% participation. So effectively, if I'm getting 35% of all the capital I raise to pitch an altcoin or to pitch an equity, then I'm going to overmarket them. I've never had, Nick, in my entire career, in 30 years, I've never had a person in a suit show up in my office and pitch me on a simple investment strategy. I've never had an educated person pitch me on own Bitcoin and hold forever. I've never had them pitch me on just buy some high-quality property and wait. I've never had them pitch me on just hold the index and wait. I've never had a doctor pitch me on, why don't you just fast? Just stop eating. Exercise a bit more. I've never had a doctor tell me just stop doing bad things and start doing good things because nobody gets paid. The guy with the PhD and the suit doesn't get paid. The doctor doesn't get paid. The pharma company doesn't get paid. The CEO doesn't get paid. So ultimately, it's up to pro bono ethical educators to stand up and tell the world why things like living healthy or fasting or owning Bitcoin are ethical, ethical imperatives. And that's what we're doing right now, I suppose. So thanks for listening to me on this. Do you have any final questions?
Bhatia: You know, what we'll do, Michael, is we'll do a follow-up here where we can break down maybe some of the additional nuances to what it's like to compare Bitcoin and equities. But you've given us so much to chew on here with a couple dozen risk factors that are present in equities that we don't see in Bitcoin. And you answered my main follow-up question along the way, which was, well, do index funds mitigate these risks that you're talking about? And your answer is no, your answer is no, not whole, not wholly. And so thank you, Michael, so much for joining us today and explaining to us the difference between equity and Bitcoin and really how we should think about these two asset classes over the coming decades, not just in the present. Michael, is there anything else you'd like to share with our audience before we let you go? Yeah, thanks for having me.
Saylor: I enjoyed it and I look forward to our next conversation.
Bhatia: Great. Thanks, Michael. Appreciate it. Join us at The Bitcoin Layer on YouTube and make sure to subscribe to our newsletter at the bitcoinlayer.substack.com.