How Mark Cuban Became A Billionaire
Grant Davis |
Who Is Mark Cuban?
You may know Mark Cuban from his bold personality on Shark Tank.
Or you may know him as the owner of the Dallas Mavericks.
Yes, he’s a billionaire. Forbes pegs Cuban’s net worth at $3.7 billion as of July 22, 2018.
But what you probably don’t know is that Mark Cuban made A LOT of money investing in the stock market.
Cuban more than 7x’d his net worth in a short time trading stocks.
His claim to billionaire fame was selling Broadcast.com to Yahoo for $5.7 billion in 1999. It was perfect timing. As it was right before the tech bubble burst in 2000.
We’ll get to that. But Cuban’s investment philosophy and lessons learned were molded along the way.
We’re going to cover several investment lessons that spanned across his life. Ones he practiced knowingly and some maybe unknowingly.
How Mark Cuban Became An Entrepreneur
Cuban hides nothing about his early struggles on his blog.
Going into his senior year at Indiana University, he opened Motley’s Pub. Not long after it got shut down after a 16-year old won a wet t-shirt content. (Cuban jokes about it now).
Cuban was bouncing all over the place after college. He was unsure of what he wanted to do.
At 24, he slept on the couch of a 3-bedroom apartment. Sometimes he ended up sleeping on the floor. The 3-bedroom apartment housed five of his other friends.
He became a software salesman for Your Business Software in Dallas of 1982. That job paid him $18,000 per year (about $47K today).
Cuban didn’t know much about software. But he wanted to succeed so badly… he read every software manual he could get his hands on.
Cuban said on his blog:
“I couldn’t put them down. Every night I would read some after getting home, no matter how late.”
This brings us to the first investing lesson. One Cuban maybe didn’t realize he was applying this early on.
Investing lesson #1: compounding.
Compounding is “The process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time” according to Investopedia.
Albert Einstein calls compounding the eighth wonder of the world. And the “most powerful force in the universe.”
Quick question: Would you rather have $2 million today? Or a penny doubled every day for 30 days straight?
If you answered the penny doubled every day straight for 30 days – congratulations. You likely knew about compounding already.
A penny doubled everyday for 30 days would be worth $5.3 million.
That’s the power of compounding. Becoming successful through investing (as an amateur) comes almost exclusively through compounding.
You’ll see compounding works its magic over the last 10 days.
The point: the less trading you do and the longer you hold, the better. You’re your own worst enemy in terms of long term investing success.
But compounding doesn’t just apply to finance.
It applies to knowledge. Sports. Writing. And pretty much everything else.
The more you spend time working on something… the better you’ll be at it.
So what did Cuban do?
Cuban read software manuals every day for six months. He also spent tons of time learning how to install, configure, and run the software.
The secret to lifelong success is lifelong learning” – Ben Franklin
Think about how much he picked up and learned over the course of six months. (Have you tried learning a skill or doing something every day for six months? We guarantee you got better at it… whatever you did).
He said he wasn’t passionate about computers or software. But the more he worked at it, the better he got. So he continued compounding his knowledge.
Six months later he built a decent-sized client base. He earned consulting fees for whatever requests.
Then he took a major risk and closed a deal without his boss’s permission. He followed his salesman instincts and closed the deal. But came back to the store with his boss waiting for him. And got laid off.
It turned out getting fired was the best thing that happened to Cuban.
“It’s always the little decisions that have the biggest impact. We all have to make that ‘make or break’ call to follow orders or do what you know is right. I followed my first instinct: close the sale.”
This brings us to investing lesson #2: Entrepreneurs take calculated risks.
An entrepreneur is “a person who organizes and operates a business or businesses, taking on greater than normal financial risks in order to do so.”
They put everything on the line. Their idea. Their capital. Maybe someone else’s capital. Execution. Fear of rejection.
Cuban was already an entrepreneur by definition. He started Motley’s Pub (which got shut down shortly after.
But this was different. Cuban could’ve easily looked for another job. Maybe one for much more money.
He decided to start his own business instead. Cuban didn’t like working for anyone.
But he took a gamble on his knowledge and skill set. And started MicroSolutions in 1983.
How Cuban Made It To His First Million
Cuban started MicrosSolutions because his passion was “getting rich.”
It was his way of just going for it – taking that entrepreneurial risk.
There was no capital raise. No outside funding. It was all “sweat equity.”
MicroSolutions was profitable every single month in its existence. They never had a losing month, quarter, or year.
Cuban ended up selling MicroSolutions seven years later in 1990. CompuServe – a subsidiary of H&R Block – bought it for $6 million.
The first thing Cuban did was take $1 million and distribute it to his employees.
He made $2.5 million pre-taxes. And cleared $2 million after taxes. Tacked on with a million he saved in the bank, his net worth was around $3 million.
What happened next is little talked about. But where Cuban more than 7x’d his net worth.
How Cuban Grew His Net Worth By Seven Times
Mark Cuban traded stocks throughout the early 90s up through the time he sold Broadcast.com.
The early 90s was when tech stocks really started to take off.
Cuban bought and sold stocks to a point where Goldman Sachs made him a partner in a hedge fund… which he then later sold.
He revealed he passed $20 million in net worth through trading stocks on his podcast with James Altucher.
One example of his trading success was shorting Xethanol, an ethanol company which made alternative fuel. He then took another major position and shorted 25,000 shares of UTEK Corp. Which was a major shareholder in Xethanol.
Cuban shorted 10,000 shares – betting the stock will fall – at a price of $12.65 in May 2006. The stock fell to around $5.09 – a 60% gain – in August. (Although there was a lot of controversy surrounding this trade).
His goal on his blog was “to never have to cover.” Meaning he assumed shares would go to $0. Xethanol renamed itself to Global Energy Holdings Inc. in 2008. Then filed for banktupcy in 2009.
Who knows how much Cuban made on the trade. But if he did hold till bankruptcy. He sure as hell made a lot of money doing it.
Cuban could’ve held much longer for an even bigger gain. But there was a lot of controversy around this trade.
Mark still traded well into the 2000s. Even after he sold Broadcast.com for $5.7 billion to Yahoo in 1999. But it wasn’t just his exit to Yahoo where he made a boatload of money. It was his collar trade that allowed him to keep a large majority of his net worth.
The tech bubble burst. Almost everyone lost their shirt. Stock investors. Business investors.
But not Cuban.
Mark Cuban’s Famous Collar Trade That Kept His Billion Fortune
Mark Cuban became a billionaire with the sale of Broadcast.com to Yahoo.
The sale was for $5.7 billion. Cuban invested just $1 million of his own money. Nothing else. No outside funding either.
Yahoo issued roughly $130/share of its own stock to buy Broadcast.com. It bought broadcast at 57x revenue.
A little perspective on how crazy that valuation is and how crazy the tech bubble was.
Today – Summer 2018 – Facebook trades at 11x revenue. Netflix at 12x revenue. Twitter at 10x.
If Facebook traded at 57x revenue… it would have a market cap of $2.5 trillion. Netflix would be valued at $727 billion. GoPro at $57 billion. Fibit at $80 billion. And so on.
Yet Broadcast.com made $0 in net income. That’s right. Zero. And Yahoo paid nearly $6 billion for it.
Cuban became a billionaire when the acquisition closed.
But his true savviness of trading stocks came into play immediately after.
Cuban went straight to Goldman Sachs and had them use options as a way to protect his paper wealth.
Cuban specifically used the collar trade. A collar trade is where you sell calls while simultaneously buying puts.
Selling calls means Cuban was willing to sell his shares of Yahoo to someone else while getting paid to do so. Speculators are the buyers in this case.
Buying puts is like buying insurance for stocks. It protects your downside.
Cuban used the collar trade to hedge the bubble he knew was coming. After all, that is how he had the foresight to sell Broadcast.com at the top. (And also a little luck in terms of timing).
This brings us to investing lesson #3: Hedging.Look, the hardest thing to do after you’ve made a shit ton of money is to be able to keep it.
Just look at the hundreds of athletes who make tens of millions of dollars… and go broke within a couple years.
Yes, the circumstances are different. These athletes and actors/actresses spend lavishly on things they don’t need.
But Cuban’s situation could’ve ended just as badly. Yahoo’s stock fell by more than 90% during the tech bubble. Losing over $100 billion in market cap.
Cuban wasn’t just smart hedging his position. He could’ve reinvested everything back into other tech companies during that time. But he didn’t.
From CNN in November 2000: “Of the 280 stocks in the index, 79 were down 90 percent or more from their 52-week high. Another 72 were down 80-89 percent. Only five were down less than 5 percent.”
When you make a shit ton of money – always keep a rainy day fund. Don’t go all in. Hedging your bets doesn’t mean taking the other side, necessarily. It just means you shouldn’t put all your eggs in one basket.
Mark Cuban’s Net Worth
Forbes pegs Cuban’s net worth at $3.7 billion as of July 22, 2018.
This comes from a lot of home run investments across his four decades of business and investments.
Cuban made his first million selling MicroSolutions. He 7x’d his money trading in and out of stocks during the 90s. And then made his first billion selling Broadcast.com to Yahoo for $5.7 billion.
Mark Cuban bought the Dallas Mavericks in 2000 for $285 million. Forbes pegs the Mavericks worth at $1.4 billion today. That’s a 391% increase in 15 years. Or 11.3% annualized. Pretty good. The S&P 500 returned about 2.5% annualized during that time.
Cuban has invested and made a lot of money through his Shark Tank ventures too.
According to Sharklytics, Cuban has invested nearly $20 million over the course of his time on Shark Tank. That $20 million has spanned across 85 deals for an average investment of $283,000. (Sharklytics is an amazing source to look at some of the deals he’s made. We suggest you check it out).
His other investments are numerous. Including Cyberdust – a messaging app that permanently deletes your texts messages after someone reads them.
Cuban’s also invested in Motionloft – a machine learning, sensor company that measures pedestrian and car data. This data helps companies monitor traffic metrics.
He’s also invested in Unkrn – an esports betting platform. Unkrn raised $31 million in an initial coin offering. And with the federal government removing the ban on sports betting, the company should become a lot more valuable.
His four decades long of experience have led to numerous investing / entrepreneur quotes of wisdom. Almost too many to count. But we’ll list seven of our favorites.
Seven Mark Cuban Investing Quotes Of Wisdom
Cuban’s investing experience extends across four decades.
He’s seen it all. Especially living through the tech bubble. His backyard of experience.
But also experiencing the crash in 2008-2009 too.
He’s weathered the storm and has increased his net worth from over $1 billion after the Broadcast.com sale. To about $4 billion today.
That’s no easy feat regardless of who you are.
So here are 7 finance/investing/startup quotes you should take to heart the next time you start a company. Buy, trade, or sell sell a stock. And even in terms of how you should look at private equity and beyond.
1) One “lesson is to always run your business like you are going to be competing with Microsoft. They may not be your direct competitor. They may be a vendor. They may be a direct competitor and a vendor. Whatever they may be to your business, if you are in the technology business, you have to anticipate that you will in some way have to compete with Microsoft at some point. I ask myself every week what I would do if they entered any of my businesses. If you are ready to compete with Microsoft, you are ready to compete with anyone else.”
MightyTrades Lesson: Whenever investing in a company (publicly or privately), make sure the CEO / upper management is worried about competition. Or worried about someone coming in and doing it better. If they talk about a dozen other ideas without mentioning the need to beat competition, be wary.
2) “Worrying about revenge, getting pissed at the bank, all those ‘I’m going to get even and kick your ass thoughts’ were basically just a waste of energy.”
MightyTrades Lesson: Revenge is a waste of time. It directs your time, energy, and resources away from the most important part of the business: growing it. Don’t let pettiness get in the way.
3) “it doesn’t matter how many times you fail. It doesn’t matter how many times you almost get it right. No one is going to know or care about your failures, and either should you. All you have to do is learn from them and those around you because…All that matters in business is that you get it right once. Then everyone can tell you how lucky you are.”
MightyTrades Lesson: Getting lucky is a major factor in investing success. Hitting on one moonshot can make up for a dozen losers. Venture capitalists know 9 out of 10 of their investments will likely fail. But the one company that 100x’s more than makes up for the losers. Investing trading legends like George Soros, Stanley Drunkenmiller, Carl Icahn, and others get it right less than 50% of the time. But it’s the winners that need to make up more than the losers.
Position size accordingly. Don’t load up on one stock. Invest evenly across high speculations. You just need to hit on one moonshot investment.
4) “I’m always afraid of failing. It’s great motivation to work harder.”
MightyTrades Lesson: Everyone’s a genius in a bull market. But if you’ve ever had an investment that has lost you a lot of money, you know you’ll never want to lose that much capital again. Do your due diligence on all stocks you invest in. Invest in what you know.
5) “If you don’t have the thirst to learn and the desire to compete, then you’re probably not going to succeed”
MightyTrades Lesson: Are you willing to put the time into knowing the company you’re investing in? If you don’t think you know enough about the stock, don’t invest in it. Either put it in an industry ETF or just a market index fund until you feel comfortable investing in that business.
6) Recessions are the best time to start a company. Companies fail. Others hold back capital. If you are willing to do the preparation and work, it is the best time to invest in yourself and start a business.
MightyTrades Lesson: Cuban’s essentially saying “buy when there’s blood in the streets.” Be a contrarian. Buy when no one wants it. You could’ve bought world class companies for pennies on the dollar at the bottom of 2008-2009. Apple was trading around $12. Netflix was trading around $3. Amazon was trading around $40. Disney was trading for $18. Were you a buyer in that time? Do you have the stomach to buy when NO ONE else wants it?
7) Three main takeaways about what makes startups fail:
- “They think the idea is more important than the execution of the idea.
- Not enough focus on sales.
- They lie to themselves about how great the product or service is and don’t realize how hard their competition is working to kick their ass.”
MightyTrades Lesson: This is similar to the first quote. Always be worried about competition. Someone will always try and do it better than you. Adapt and change or die. Think Blockbuster. Kodak. RadioShack. All refused to change. All died.