Keep The Alphabet In Mind

By: Yale Bock, Y H & C Investments

When you start out in education, you are taught the grading scale. A means excellent work or outstanding. D or F represents poor performance or failing. An additional category is for behavior. These classifications are E for excellent, S for satisfactory, or U for unsatisfactory. Generally speaking, people across the globe understand A is for excellence, F is for failure.

Capital markets have their own version of grading scales, and it is especially important when it comes to analyzing and evaluating assets. A few quick basics to get started. When a company raises capital in the equity market, it issues shares. If it issues 1 million shares at 10 dollars a share, that means it raises 10 million dollars. It can also issue debt through notes or bonds, which means it will have to pay interest on the debt to the owners of the debt obligations. By issuing shares or debt, an enterprise increases the capital of the business (for shareholders or debt owners, called creditors). When a company buys back stock or debt, it is reducing the number of instruments available (shares outstanding or debt owed). From an owner’s point of view, when a company issues shares, the existing owner now owns less of the company. If the entity buys them back, the current shareholder owns more of the company. Ok, let’s turn to our version of the grading scale, shall we?

When there is a merger or acquisition, a deal is either called accretive or dilutive. Accretive means that the deal is projected to add earnings (profits) on a per share basis. It means each owner will wind up with more profits per share of stock they owned than prior to the deal. As this is a good thing for owners, we will give accretive the A grade. Dilutive means a deal is projected to lower profits on a per share basis. Clearly, this is not a good outcome for existing owners, so we will give this a D grade. One of the classifications for behavior is an S for satisfactory. We are going to use the S to represent the very important concept of scarcity. Scarcity means having a limited amount of something. The easiest way to understand it is there is only one of any individual persons in the world. There are over 8 billion humans on the planet. However, each person is unique. Another example to understand scarcity is real estate. There is only one Empire State Building or Grand Canyon. Ok, now let’s turn to the most prominent situation in the capital markets, what some observers are now hailing as a big comeback.

People love comeback stories. Historically, probably the most famous one is Napolean. Politically, the current comeback kid is our existing President, Donald Trump. Prior to that, Bill Clinton used the line after his second-place finish in the New Hampshire primary vaulted him to the Democratic nomination and the Presidency. Ok, but in the stock market today, the be all and end all of comebacks is now Michael Saylor, the co-founder of Strategy (formerly MicroStrategy-MSTR). 

Mr. Saylor founded the software company in 1989 and served as the CEO until 2022. It initially had spectacular success during the dot com period, but the company was accused of accounting misstatements for three years of prior financial filings and the stock plunged, wiping out over $6 billion of Mr. Saylor’s personal value. His comeback involved the asset bitcoin. Let’s briefly return to our grade scale. The whole premise of why Bitcoin is a valuable holding is through the idea of scarcity, S. Published in a white paper¹ by Satoshi Nakamoto in 2008, a key component was there are only 21 million bitcoins across the globe. As we speak today, there are only 19.9 million available. Mr. Saylor decided he would change the direction of Strategy by buying massive amounts of Bitcoin in August 2020. Over the last five years, Strategy has bought over 600 thousand bitcoins. The largest owner is Mr. Nakamoto with over one million coins.

Mr. Saylor applied his own version of creative finance and fundraising by using all kinds of company instruments to purchase Bitcoin. He has issued straight debt, convertible debt, preferred stock, and common stock to raise money, all to buy bitcoin. These capital raises have worked for Mr. Saylor, as the value of bitcoin has risen to over $100K per coin. It has worked so well that the value of the strategy stock was worth double the market value of the coins which Strategy owns (the premium has shrunk). If one wanted to own bitcoin, one could just buy bitcoin or an exchange traded fund that owns bitcoin.

Naturally, Mr. Saylor has received a lot of attention for his success, so much so that there are market participants who are copying his approach by buying other crypto related assets like Ethereum, Ripple, Solana, and the joy that is Hyperliquid. These imitators are called digital holding companies and can be bought on the listed exchanges as well. No, I don’t own any and will not participate. For a more detailed look on this topic, Matt Levine writes an excellent column that might help as well (skip to the part that says Strategy) –Pod Shops Are the New Banks – Bloomberg²

My own thinking is this strategy has currently worked as the underlying value of the asset in question has gone up. If, however, it goes down and in size, then all of the instruments which have been issued to buy Bitcoin may at some point have to be converted to stock. Many shares of stock would have to be delivered to cover the loss of value of the underlying holding (Bitcoin). It would mean massive dilution. Remembering our grade scale, the current A grade could very quickly become a D. Time will tell and who knows what would have to transpire for the price of Bitcoin to dramatically fall so much. Potentially, the same thing can happen to the imitators as well. However, the one important point to consider is the underlying idea of scarcity, S. We apply this idea to analyzing companies. The basic premise is choosing entities with capital structures which are advantaged, meaning scarce, so when they prove the merit of the business, as owners of the limited number of shares we benefit. In sum, it is important to understand the fundamentals of any asset to improve the probability of a positive outcome when investing your hard-earned capital.

Originally published on September 2, 2025 on YH&C Investments newsletter and blog

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Y H & C Investments may have positions in companies mentioned in this newsletter. Nothing in the newsletter should be taken as an offer to buy or sell individual securities. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives.

Investing involves risk. You can lose your principal. Past performance is no guarantee of future results, and all investments involve the risk of loss, including loss of principal and a reduction in earnings.