Lessons from DWAC; More on DWAC from Enrique Abeyta; My dad is home!

1) Longtime readers may recall that I first warned about Digital World Acquisition (DWAC) – the special purpose acquisition company ("SPAC") that hopes to merge with former U.S. President Donald Trump's media company that owns Truth Social – more than two years ago on October 22, 2021, when it hit a high of $175 per share.

On that day, I wrote: "This is one of the stupidest things I've ever seen," and "this stock is going to implode, likely within days."

Sure enough, the stock peaked that very day, was cut in half within two days, and continued sinking toward DWAC's cash value of $10 per share through last April.

I continued to warn my readers about this stock – which I thought, and still think, is a toxic piece of garbage – in dozens of e-mails.

Yet in my e-mail on April 14, 2023, I told my readers that it was no longer a good short, writing:

So if you've been clever enough to short the stock, why do I suggest covering now?

Simply put: price.

The stock closed yesterday at $13.14 per share, only slightly above DWAC's cash. Given that I think there's almost no chance the deal to acquire Trump Media and Technology Group ("TMTG") goes through and it's likely too late to find another deal, DWAC is almost certain to liquidate and return $10 per share to shareholders.

I noted that as such, anyone who was short the stock at the price at the time would pocket a gain of $3 per share. So why wouldn't they stick around? As I went on to say:

Because "almost certain" isn't the same as "100% certain" – and, as we've seen, this stock can trade almost anywhere, totally disconnected from its fundamentals.

I'm wary of picking up pennies in front of a steamroller, which I discussed at length in my January 20 e-mail.

No matter how likely the outcome, it doesn't make sense to risk losing tens of dollars (and possibly more than $100) per share to make $3...

Well, it turns out that I was both exactly wrong... and exactly right.

To my surprise, the U.S. Securities and Exchange Commission ("SEC") approved the deal last week – sending DWAC skyrocketing to close Friday at $48.54 per share. (For more on this, here's Reuters with the story: SEC clears Trump's social media deal worth as much as $10 billion.)

But anyone who was short the stock and covered when I said it was a good idea to do so – at $13 per share – made a fortune on its decline. They also wouldn't have given any of it back in the recent rally because, even though I thought the deal going through was highly unlikely, I knew it was possible – and therefore knew that the stock was a bad short.

This is a brilliant case study of why long-term investment success isn't just about stock picking – which involves doing good analysis and making high-probability bets.

It's also about risk and portfolio management – and being humble. You must always recognize that, no matter how much conviction you have in a stock – long or, especially, short (given the possibility of unlimited losses) – you might be wrong... so you need to factor that into your decision making.

In particular: Beware of picking up pennies in front of a steamroller!

Lastly, this case study underscores one of the main reasons short selling is so difficult: You never can tell when a stock you're short for all sorts of good reasons might get a deal done, be acquired, have a drug approved, or simply get caught up in a short squeeze or meme-stock mania and crush you.

2) For more on the implications of the DWAC deal going through, here's some interesting commentary from the free daily e-letter published by my friend and former colleague Enrique Abeyta at his new firm HX Research: Could a SPAC Save Donald Trump from Bankruptcy? Excerpt:

Could Trump sell shares in DWAC and solve his financial problems?

The answer is – YES.

Many things need to fall into place for any of this to happen. The deal has to close, and some time must pass before he can sell shares. The value of the shares may fall, etc.

However, we think that if the deal closes, he could get a margin loan that would cover his costs.

How likely is his holding in DWAC to bail him? We think it is a low probability, but it IS possible.

Meanwhile, Enrique considered what to do with DWAC now:

Congratulations if you are a holder – you just made a TON of money! Now SELL!

Or at least sell what you initially put in, plus another 25%, and then let the rest ride.

Should you short the stock? Honestly, it's uncertain that you could get the shares to short, so it may not even be possible.

Also, the stock may continue to increase and even double or triple from here!

And as he concluded:

In our view, there is a 99%+ chance that these shares will be (much) lower before the end of the year.

Whatever ends up happening here with Trump and DWAC, it will be interesting to watch!

3) Thanks to the many readers who wrote to send me best wishes for my dad!

I'm so glad I decided on Thursday when I learned he was in the hospital in Nairobi (my parents have retired in Kenya) to take the next flight on Friday to see him.

I arrived on Saturday afternoon and spent the rest of the day and Sunday with my parents. Here's a picture of us with our friend Tammy, a college friend of my sister:

Hilariously, to get a private room with air conditioning, they put him in the maternity ward!

By wonderful coincidence, Sen. Cory Booker – my friend of 30 years (since a mutual friend introduced us when he was at Yale Law School) – had just flown into Nairobi for two days... so we all met for dinner on Sunday night:

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.