Mark Cuban Protected His Yahoo Stake With a Basket Goldman Sachs Built for Him
Holding the bet cost him tens of millions before it paid off.
All-In with Chamath, Jason, Sacks & Friedberg · Mark Cuban on the AI Bubble: Who Actually Gets Wiped Out?Mark Cuban looked at his pile of Yahoo stock and asked himself, in his words: "How rich do I need to be?"
Cuban, who was with Broadcast.com when Yahoo acquired it, said the company had bought five companies using stock. Then Yahoo came along and acquired Broadcast.com, leaving Cuban holding a large stake in Yahoo.
If the price drops, a fortune tied to one stock drops with it. Cuban said that "I just need to be protected," and that a collar would let him, in his words, "save part of my upside, but just cover my downside."
A collar, in plain terms, is a financial guardrail. It sets a floor under what owned shares are worth, while giving up some gain if they keep rising. The problem was that no such protection existed for his Yahoo stake at the time.
So Cuban set up a temporary hedge. Cuban said he "had Goldman Sachs create an index of internet stocks," a basket of other dot-com shares that could be traded as one package. He chose shares in companies he expected to fail, and he bet against that basket. In Wall Street language, he shorted it.
The idea was that a fall in internet shares would be cushioned by gains on the bet against the weaker basket. He held that short until he was able to put a real collar on his Yahoo stock, and he said they followed all the laws in doing so.
Waiting was costly. Cuban said, "I lost tens of millions of dollars on that short" while he kept it in place.
He said he made up for those losses. Cuban called it "one of the great trades of all time."
For employees at today's startups, he put it as a personal wish. He said if he went to work for a company like SpaceX, or any company where the stock could change his life, he would want someone to put together a collar for him.
Questions people ask
What exactly is a collar?
A collar is a combination of two contracts tied to stock you own. One, called a put, gives you the right to sell at a set low price, so you cannot lose more than a certain amount. The other, called a call, gives someone else the right to buy your shares at a set high price, which caps your gain and helps pay for the protection.
What does it mean to short an index?
Shorting means borrowing shares and selling them, hoping to buy them back later for less. Shorting an index means doing that with a whole basket at once. If the basket falls, you profit on the short, which can balance losses on stock you own.
Why couldn't Cuban just sell his Yahoo shares?
Founders and employees who get stock in a sale often cannot sell right away because of lockup agreements and securities rules. A temporary hedge lets them get protection during that waiting period, which is why Cuban needed a stand-in until he could hedge his Yahoo shares directly.