This is not financial advice. Do your own research. Invest what you can afford to lose.

Our Strategy: We operate an insurance business that sells put options to stock investors. We help investors limit their losses if their stock falls below a certain price. In return for our protection, investors pay us a premium/upfront fee. Read Letter 2 and Letter 3 to understand more of the mechanics.

Please note: We use 1 policy to represent our deals because we want everyone to be on the same page. In practice, we might sell or buy multiple policies at a time.

On Thursday, March 19, Super Micro Computer’s $SMCI ( ▼ 33.32% ) co-founder and a contractor were arrested for allegedly smuggling NVIDIA $NVDA ( ▼ 3.28% ) powered data center servers into China. The company’s sales manager was also charged, but he is currently on the run. Since 2022, America restricted the sale of advanced chips to China because the country uses the technology to improve their AI and military capabilities.

Smelling an opportunity to make money, the alleged conspirators used a company in Southeast Asia to receive shipments of the servers, then they redirected the servers to China. The indictment said $2.5 billion was generated from the scheme. Super Micro Computer is distancing themselves from the allegations by saying they were not mentioned by name in the indictment, and they terminated the contractor and placed the employees on leave.

Statement from Super Micro

We will let the court litigate the merits of the case.

There is a good chance the 2 dominant GPU makers, NVIDIA and AMD $AMD ( ▼ 1.92% ), will stop selling their chips to Super Micro because of this situation. We expect their business to suffer as their main suppliers abandon them.

Read the full indictment below.

Alleged conspirators using a hair dryer to alter labels and serial numbers.

Warehouse full of fake servers used to trick inspectors.

We thought the company would chill and not engage in any questionable activity since everyone is watching them. They’ve been fined in the past for accounting issues. They’ve been accused of shady business practices. Their stock has dropped over 70% because of their dubious reputation.

We thought they would stay cool, especially since they are a major partner to NVIDIA and AMD. We were wrong.

The policy we sold protected the buyer if their Super Micro stock fell below $26. The stock was at ~$30.68 when the policy started. A nice, safe cushion of 15%.

That cushion evaporated when the stock fell 33% in less than 24 hours. The stock closed Friday at ~$20.

We bought the policy back to cancel early.

It cost us $212.32.

Since we collected $54.68 when we sold the policy, our total loss is $157.64.

Our loss was less than expected because there was significant time left on the policy. By exiting with 28 days left, our policy had value in the market. Another insurer could buy our policy and wait 28 days for something positive to happen.

If we held the policy until expiration, and Super Micro stayed below $23, we would lose $245.32 instead of $157.64.

Although we dislike losing, it’s good that we protected our downside and lost less than expected.

We need to stick with the SIGE framework when selling insurance on these companies. We partially applied it to Super Micro and that was a fatal mistake.

S in SIGE stands for Safety of our Money. If our money is not safe in the investment, we must pass on the deal. Period.

No cushion or potential return should make us feel comfortable selling insurance on a company accused of fraud.

We must analyze companies like we are going to buy the stock.

SIGE Checklist:

God warned us when he told Adam, “By the sweat of your face you shall eat bread…”

Nothing in life will be easy.

Let’s continue building our own little insurance company. The goal is to make more than we pay out.

Stay strong, stay blessed, and God willing, we’ll see each other next week.

If you have any questions, email me at [email protected]

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