Not too long ago we talked about chasing unicorns in Silicon Valley and the downfall of Elizabeth Holmes. Now the collapse of cryptocurrency exchange FTX. In this Tough Things First Podcast, Ray Zinn discusses how investing should be more than just a casual wager. (Watch the video version here…)
Rob Artigo: Welcome to the Tough Things First Podcast, your indispensable source for business, leadership, and life advice with the longest-serving CEO in Silicon Valley. I’m Rob Artigo, your guest host, and he’s Ray Zinn. Hello, Ray.
Ray Zinn: Hey, Rob. So good to see you.
Rob Artigo: Good to see you too, Ray. This is a special edition of the Tough Things First Podcast. It’s on video. So if you’re listening now and you want to check it out on video, you can go to toughthingsfirst.com, find this podcast, and then right next to it will be a link to Ray’s video channel and on YouTube. You can check that out. And you can also see the previous versions of the Tough Things First Podcast on the YouTube channel.
So Ray, not too long ago we talked about chasing unicorns in Silicon Valley and the downfall of Elizabeth Holmes. She was recently slapped with more than 11 years in prison for fraud after she deceived investors about the efficacy of her company’s blood-testing technology. Most people in the business world have heard this. It’s a cautionary tale in many ways. Now, we hear about the recent collapse of cryptocurrency exchange FTX, with an estimated 1 billion to $2 billion of missing funds out there. I’ve heard recently that it could be as much as $8 billion that was affected by this. Sam Bankman-Fried, the founder of FTX, faces what could end up being a worse penalty than Holmes faced.
So Ray, you’ve always been skeptical of the cryptocurrencies and the exchanges as they operate kind of like a pyramid scheme. Is that fair to say?
Ray Zinn: Yes. Actually, Rob, what’s interesting is that anything that sounds to be too good to be true, it probably is.
That’s kind of the story that I always follow is that, do the taste test. And if it doesn’t taste right, run from it. Don’t just walk, run. And so the unfortunate thing about chasing something that sounds good is that it usually isn’t. As they talk about flipping a coin, half the time they’re heads, half the time they’re tails. We don’t really get that many home runs, if you look at baseball or any other sport. The outliers, what they call it, the Hail Mary or the… What’s that one in hockey? The triple hat trick or whatever it is.
Rob Artigo: Yeah, the hat trick. Yeah.
Ray Zinn: Right. Hat trick. Those and just shooting a basketball from half court and stuff, sure, there’s a possibility of making it, but it’s not highly likely. And so Elizabeth Holmes, I heard about her game over 10 years ago. I was approached to invest in her Theranos. And I looked into it and I said, “Ah, something doesn’t sound right.” If something again is too good to be true, it just really should be looked at skeptically, and cryptocurrency is the same thing. I know Bitcoin is still okay. I mean it’s the digital coin, the digital currency. It’s still potentially viable if it’s controlled. Again, we have to run that taste test and see if something is really, really viable.
As you can well imagine, I’m approached all the time about these one-in-a-lifetime opportunities. And I look at them and as closely as I can and I weigh all the options, all the alternatives, but then I go with my gut. If my gut tells me, “Back off,” I do. Now, is that 100% of the time that I’m right? No, but I’m right probably 80 to 90% of the time. And so Webvan was another one that I was approached with that that goes back to the dot-com era. And even though, today, we do have Webvan-type services, Safeway and people like that do offer it, I thought it was too premature, and it would only last as long as the dot-com era continued.
And then we had the pandemic, and it fostered some fly-by-night opportunities for certain companies. I mean almost all of these companies like Peloton… Pelotron? Peloton?
Rob Artigo: Peloton, yeah.
Ray Zinn: They tend to take advantage of a downturn or a pandemic or something like that, but that’s not a long-term opportunity. So anyway, anytime you have a downturn or a cycle, it usually lasts only a year to two years. So if your business is focused on a one to two-year opportunity, then you have to pivot, look for something else if it doesn’t pan out or continue on after the pandemic or the downturn is subsided.
Rob Artigo: Well, I’ve read in some recent opinion columns, at least one in particular, gave the advice that we should treat investments as if they were a Vegas gambling bet, and that is a wager based on how much we’re willing to lose. Is a gambling mindset a good mindset to approach investing in the real world?
Ray Zinn: Well, not in my mind, but obviously there are people who are willing to bet two raindrops coming down a window. So some people like to gamble. Obviously, it’s a huge business, and so there are people who get involved in gambling. And they say the stock market is a gamble, and that’s true. I just recently I did some calls on a stock that I had, sold some calls, and I thought that there was no chance for it to get it called away, and then it got called away on Friday. So the market does change, it does move. And you have to figure out, okay, how much you’re willing to lose? Now in the case of a call, which means that you sell an option for them to buy the stock at a certain price and they pay for that option. It’s like any other first right of refusal as you would.
They’re banking on the fact the stock gets to a certain premium and then I have to sell the stock at a lower price. It’s like a stock option. And then they pocket the gain. Anyway, so you have to be careful whether you’re doing puts, or calls, or anything else that’s a gambling-type thing. You have to know what you’re doing. Be willing to take the loss or the gain, depending upon which way it goes. And so again, life is a form of a gamble in a sense, but the odds are pretty much in your favor provided you do the right things. So anyway, the game here, of course when you talk about cryptocurrency, it’s not a controlled currency, and so therefore, people can be dishonest.
Rob Artigo: Right. It’s not a controlled environment in the sense that there’s the appropriate regulations need-
Ray Zinn: That’s what I meant.
Rob Artigo: … in order to be able… You can’t make an educated decision in an environment of chaos. I mean that’s what I’m hearing from you, is you can’t really make an educated decision if the environment is constantly changing and has no rules or structure.
Ray Zinn: Regulation. Yeah, that’s the key here. Going back to Theranos, the concept or the thought was, or least she claimed that her machine could do a blood diagnosis in a matter of minutes, and only took one draw from your body, a blood draw from your body. And I thought, “Well, how come then if it takes three or four draws and then takes a few days to analyze it, how can she do it in just a matter of minutes?” It’s the same thing, I was skeptical in the beginning on the Omicron test, that they could test that in just a matter of few minutes because now you have it at home. So it is possible, and again, I don’t know what the therapeutics are for the Omicron to be determined in a matter of few minutes. It’s not that accurate either, as you know.
But when you do a blood test, that’s a different story because you’re really depending on accuracy in order to determine what type of therapeutics you’re going to need following the analysis of the blood. Anyway, but hers was even more hokey because her machine was just a joke. It’s kind of like a fancy box with nothing in it. So again… In any investment, Rob, in any investment you have to have some degree of skepticism. I don’t care whether it’s the stock market or whether it’s buying a home. Whatever you’re doing, make sure that you have your homework well in hand before you make a decision.
Rob Artigo: And a good metaphor for FTX is it was a fancy box with nothing in it. And when we were talking about doing this video podcast here on Tough Things First, we talked about the fact that it operated like a pyramid scheme. It operated where is if you got in at the beginning, you made money. If you got in at the end, you didn’t do so well. And as time goes by, I would imagine these gamblers who don’t really know how to check the fundamentals of a company start coming in with smaller amounts of money. This is where we end up having those tragic stories about the person who lost their life savings. They end up losing their life savings as a result. And so if you’re going to put your life savings… I wouldn’t put my life savings on anything, any kind of investment like that. But if you want something to go off the cliff really fast, make sure that all your eggs are in that one basket because it’ll come back to bite you. And like I said, FTX operates like a multilevel marketing scheme and it ends up being one, right?
Ray Zinn: Yeah. Well, they outlawed those pyramid schemes for a reason because people take advantage of people. It’s like a chain letter. If you can be dishonest, if there’s a chance to be dishonest, there will be somebody who will be dishonest. And that was the problem with FTX. They got a whole bunch of movie stars and sports people to come in and invest, and they make it sound legitimate. Investing in these political situations and these well-known political guys. What they try to do is make it sound legitimate. Just like in Theranos, they try to make it sound legitimate even though it isn’t, okay? If something, again, is too good to be true, it probably is.
Rob Artigo: Really, another cautionary tale and we’ll see how this plays out and how it ends up impacting cryptocurrency in general because it is still an unregulated market, where it’s a complete guess where you’re at before the thing collapses. That’s not to say that all these other guys are in the same boat as this character who ran FTX into the ground, and that they’re out to get people, but I’m just not putting everything I have in it. I mean, if I have 10 bucks… It’s like a long shot. You got the Kentucky Derby and you decide to make a bet on the 25 to one odd horse because all the faster horses are one-to-one odds or something like that. Then you’re like, “Hey look, I’m going to bet $10 on this one horse and I might make some money if for some surprising result they end up winning. But I could lose that $10 and I’m not going to go hungry for the day or the lights are not going to go off in my house, which are really important.”
But some people will go… And this is a Seinfeld episode I was watching the other day, Kramer’s on the subway train and he hears two guys in the next booth over, sitting there talking about this horse that’s going to break its maiden, as they call it, and it’s going to win and it’s a long shot. And they said it was like… I don’t know what the number was, but it was really massive. And Kramer got all excited, took all the money he had went over and bet on that horse. Now, it’s fiction, right? His horse wins, so that was a big surprise. Most of the time, that’s not going to be the case. Even if you hear the hot tip in the seat next to you, if you’re going to make a… I guess based on what I’m hearing you say is, hey, if you take a flyer on something, make sure it’s money that you literally could do without, right?
Ray Zinn: That you could afford to lose. Again, that’s the same thing when we do [inaudible] analysis and doing a statistical analysis on the make or buy decision. Make sure that probability level is within your beta. In other words, what you think you can tolerate. So on average, I would say I wouldn’t go with anything that had less than a 60 or 70% chance of winning. Forget the 50-50 or even worse, the 70-30s or the 30-70s. Anything that’s not got something north of 50%, I’d shy away from. Of course, that’s my opinion and you have to decide for yourself.
Rob Artigo: Yeah, it’s also a good idea to have an expert’s advice when you’re doing these sorts of things. I mean, I’m not going to go into court and represent myself. I’m going to hire an attorney because hopefully, the attorney’s a good person and a good attorney, and will do right by me. But you don’t want to be operating in an environment that you’re just not skilled to be in.
Ray Zinn: Exactly.
Rob Artigo: Recognize your limitations and how much money you’re willing to lose.
Ray Zinn: And that’s the name of the game. Just be aware of how much you’re willing to lose. The only sure thing they say is taxes and death. So just beware. Buyer beware or investor beware is really the name of the game. And again, if something’s too good to be true, it probably is.
Rob Artigo: Well, our listeners here at Tough Things First have been listening to a special video edition. Again, it’s available on the website. You can click this podcast there at toughthingsfirst.com. And if you’re listening to this now, you can go there and watch the video by clicking the link to Ray’s YouTube channel. You can always reach Ray Zinn with your questions at toughthingsfirst.com. We like to call it continuing your education, but definitely, you’re continuing the conversation if you go to toughthingsfirst.com. He has blogs and links to information about his book Tough Things First. Having a hard time saying that. Tough Things First. And the Zen of Zinn, Zen of Zinn 2, and I expect the Zen of Zinn 3 to be on the market quite soon, right, Ray?
Ray Zinn: No, it’s on now. No, no. You can go right now to Amazon and find Zen of Zinn 3. So we have Zen 1, Zen 2, and Zen 3 now. So you can buy or get Zen of Zinn 3 right now. It’s available online from Amazon.
Rob Artigo: Congratulations, Ray, on your third book. I look forward to perusing it myself. And we’ll get to the next podcast next time here on the Tough Things First Podcast. Thanks again. Great conversation, Ray.
Ray Zinn: Well, thanks for being with me today, Rob.