Bab 5: The Big Short I
I was blind but now I see. And no, not in a biblical, miracle-healing sort of way. More like that moment of clarity you get when you realize you've been using your phone with the brightness turned down. Yeah, that kind of revelation.
You remember NZT-48, right? The miracle pill from 'Limitless'? I sometimes feel like I'm on a permanent NZT trip, minus the nasty side effects. But hey, I ain't complaining! Plus, even without this 'superpower' – I'm still a Man of Focus, Commitment, and Sheer Fucking Will. If that sounds familiar, it's because you, my cultured friend, recognize a John Wick reference. Kudos to you.
Fast-forward three months, and here we are, November 1929. You've heard the lore of Wall Street's infamous crash. Black Thursday, Black Tuesday – just the warm-up acts. Now, it's my spotlight, my stage. Time to reveal my masterstroke in the high-stakes short game. Go big or go home, right?
The stock in my crosshairs? Radio Corporation of America – RCA. Their shares soared like a modern-day Icarus, reaching dizzying heights before plummeting earthward. From $505 in August to a mere $26 by November. Do the math – that's not just profit; it's a financial coup. Beat that, Gordon Gekko!
"The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind."
"Alright, enough of the theatrics, Alexander," Natalia chided, her voice a blend of amusement and gentle rebuke.
Alexander's chuckle reverberated with confidence, his eyes sparkling with mischief. "Just setting the scene, Mom. The best is yet to come."
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Upon sauntering into the brokerage firm, the scene was not just different—it was a circus. Brokers zipped around like caffeinated squirrels, their faces a carnival of worry and anxiety. If the Wall Street crash had a mood, this was it—served with a side of chaos.
Joseph, Natalia, and Alexander navigated through the chaos, their relaxed strides a stark contrast to the frenetic movement around them. Their target? Mr. Hamilton's office, the daredevil who dared to dance with their daring investment strategy.
Inside the office, the atmosphere was somewhat calmer, but the undercurrent of urgency was palpable.
"Mr. and Mrs. Sterling, and Alexander," Mr. Hamilton greeted, extending a hand to each in turn. His expression was a mask of professional composure, but the bags under his eyes told stories of recent sleeplessness. "Shall we get to business then?
"We're ready," Joseph replied. "Let's begin buying back the shares we shorted—right now, the price is optimal."
With this confirmation, Mr. Hamilton sprang into action. He moved across the floor with focused precision, his voice cutting through the noise as he shouted orders to his associates. As the orders were placed and the transactions executed, Alexander's gaze was fixed on the stock board with hawk-like intensity, watching the numbers change.
Natalia's heart raced, her eyes darting between the board and her husband and son.
"This is better than any circus, eh?" Alexander joked softly, watching the frenzied trading floor.
Though deeply engrossed, Natalia couldn't help but smile briefly at her son's comment.
Just then, Mr. Hamilton appeared, his face flushed from the exertion of yelling over the commotion. He announced, 'We've covered your positions. RCA shares are now in the portfolio at the prices you anticipated.'"
Joseph placed a firm grip on his son's shoulder, sharing a silent moment of acknowledgment. "Well done, Alex," he said. "I must admit, there were times I doubted our course of action. But seeing this outcome... it reaffirms our trust in you."
Relief evident in her voice, Natalia chimed in, "Alex, you've always stood out as an exceptional child. Today, you've proven to be a remarkable man."
Alex responded with a quip, "We're just getting started. First, let's calculate our net profit after tax. We definitely don't want to fall foul of the IRS."
"Then, let's examine the figures," Mr. Hamilton said, his voice tinged with admiration. "Your initial $15,000, leveraged at a 1:100 ratio, controlled stocks worth $1,500,000. With the stock initially priced at $505, this meant short selling approximately 2970 shares."
After a brief pause, he continued. "The brokerage fees totaled $742.50 for these transactions. Additionally, the cost of borrowing the stocks for three months was $18,750, given the annual interest rate."
Alexander listened, his anticipation palpable.
"When we covered the short in November, with the stock price having plummeted to $26, the cost to repurchase the shares was $77,220," Mr. Hamilton revealed. "This strategic maneuver netted a gross profit of $1,422,930."
Joseph and Natalia shared a glance, their eyes reflecting a mix of relief and pride.
Mr. Hamilton continued, detailing the net outcome. "After accounting for brokerage fees and borrowing costs, your net profit before taxes is $1,403,437.50. Accounting for capital gains tax, which is 12.5% of your net profit, or $175,429.69, your final net profit, after all expenses and taxes, is $1,228,007.81." His gaze lifted from the papers to meet their eyes. "Congratulations. This is one of the most successful short selling transactions I've seen."
The silence in the room was palpable as each person absorbed the enormity of their success. Finally, Joseph broke the stillness. "Incredible work, son. And Mr. Hamilton, we couldn't have done it without your expertise."
Mr. Hamilton waved his hand dismissively. "No, Mr. Sterling, the true credit belongs to you and Alexander. It was your vision and bold decision-making that brought us here. I simply helped facilitate your plans."
Alexander, having already planned their next strategic move, suggested, "Let's pull out our initial $15,000 and put $1 million into short selling United States Steel Corporation shares. They're at $166 a share now. We stick with the same leverage."
Joseph hesitated, his eyes betraying a storm of thoughts. 'Here we go again,' he mused, the corners of his mouth twitching in a mix of worry and admiration. 'Alex is really pushing the envelope, just like I used to at his age.' Memories of their last daring gamble flashed through his mind. 'We're finally getting back our initial stake... Is it wise to jump back in so soon?' But then, he thought of Alex's confident demeanor, his sharp instincts that had steered them right before. A father's pride swelled in his chest, slowly dissolving his reservations. With a newfound resolve born from trust, he nodded, "Let's do it."
Alexander turned to Mr. Hamilton. "What about the fees? Same as before?"
Mr. Hamilton let out a weary sigh. "The market crash has bumped up the brokerage fees for high-leverage short selling. The lowest we can go is 50 cents per share."
Alexander shot back playfully, "Come on, Mr. Hamilton. We're one of your biggest clients now. Doesn't that earn us a little break?"
Mr. Hamilton cracked a small smile. "I'd love to give you a discount, but these are the terms right now. Good news is, the Federal Reserve's dropped the borrowing rate to 3% annually to stimulate more investment."
Joseph and Alexander exchanged a quick look before the elder Sterling gave a subtle nod. "Your call, son," he said, a mix of confidence and trust in his voice.
Alexander's smile grew as he considered their remaining funds. "We've got $213,000 left in our brokerage account. I suggest we use this capital to quietly acquire shares in Stark Industries."
Joseph's interest was piqued. "Stark Industries? Why them?"
Leaning in, Alexander's eyes sparkled with strategy. "Their stock has taken a hit, sure, but their rebound potential is huge. Howard Stark, Sr. holds the majority, but with the stock's decline, other shareholders might be eager to sell. This is our chance to get in."
He then directed his focus to Mr. Hamilton. "Howard Stark, Sr. is an innovator, and I believe Stark Industries will bounce back stronger. Right now, their stock is undervalued, making it the perfect time to buy."
Mr. Hamilton nodded, grasping the plan. "And how do you propose we go about this acquisition?"
"We have to be discreet," Alexander explained. "Our goal is to build a significant stake in Stark Industries without alerting the market or other shareholders. If they detect a surge in buying activity, they may hold onto their shares, expecting prices to rise."
Joseph added, "A quiet, measured approach, then?"
"Exactly, Dad," Alexander agreed. "Mr. Hamilton, please use the $213,000 in our brokerage account to methodically buy shares in Stark Industries. We need to spread out the purchases to avoid drawing attention. Our goal is to have a substantial stake by mid-1932."
Mr. Hamilton nodded in understanding. "It's a nuanced operation, but entirely achievable. We'll have to closely monitor both the market and shareholder activities."
"And about the shareholders," Alexander added, "We should keep an eye on who they are. There might come a time when we could approach them directly to buy their shares."
"Perhaps employing private investigators or financial research firms could help. They might uncover useful information through public records or legal filings." Joseph suggested.
"That's a wise approach," Mr. Hamilton agreed. "I can coordinate with such firms to gather intelligence without raising suspicion."
Satisfied, Alexander reclined slightly, a look of determination on his face. "Alright, we have our plan. Let's proceed with caution and precision. Stark Industries could be a game-changer for us."
.
.
.
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Quick Maths:
1. Initial Deposit & Leverage: With an initial deposit of $15,000 and a 1:100 leverage, the total value of stocks you can short sell is $15,000 x 100 = $1,500,000.
2. Number of Shares Sold Short: At an initial stock price of $505, the number of shares you short sold is $1,500,000 / $505 ≈ 2970.3. We will round this to 2970 shares, as you can't sell a fraction of a share.
3. Brokerage Fees: The total brokerage fees will be 2970 shares x $0.25 = $742.50.
4. Stock Borrowing Rate: This is an annual rate, but you held the stock from August to November, which is approximately 3 months. The annual interest on the borrowed amount (i.e., $1,500,000) at 5% per year is $1,500,000 x 5% = $75,000. For 3 months, this would be $75,000 x (3/12) = $18,750.
5. Covering/Buying Back the Stocks: When you cover the short in November, the stock price is $26. The cost to buy back the shares is 2970 shares x $26 = $77,220.
6. Gross Profit: Your gross profit is the difference between the initial value of the stocks when shorted and the cost to buy them back. Initial value = 2970 x $505 = $1,500,150. Gross Profit = $1,500,150 - $77,220 = $1,422,930.
7. Net Profit Before Taxes: Net profit before taxes is the gross profit minus all expenses (brokerage fees and stock borrowing cost). Net Profit Before Taxes = $1,422,930 - $742.50 - $18,750 = $1,403,437.50.
8. Capital Gains Tax: The capital gains tax is 12.5% of the net profit. Tax = $1,403,437.50 x 12.5% = $175,429.69.
9. Net Profit After Taxes: This is your final profit after all expenses and taxes. Net Profit After Taxes = $1,403,437.50 - $175,429.69 = $1,228,007.81.
TL;DR
- Number of Shares Short Sold: 2970 shares.
- Brokerage Fees: $742.50.
- Stock Borrowing Cost: $18,750.00.
- Cost to Buy Back the Shares: $77,220.00.
- Gross Profit: $1,422,630.00.
- Net Profit Before Taxes: $1,403,137.50.
- Capital Gains Tax: $175,392.19.
- Net Profit After Taxes: $1,227,745.31.
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