The goal of every value investor is to buy a dollar for 40 cents. It turns out that it's also the goal of rapper 50 Cent.
The New York Post reported on Sunday that the cash-rich superstar purchased an 18-bedroom Connecticut mansion for $4.1 million from the ex-wife of financially distressed boxer Mike Tyson. The market price in 1999: $12.9 million.
Tyson, who filed for bankruptcy late this summer, purchased the property in 1996 for $2.7 million, adding a 1,000-person night club and a 1,500-square-foot-gym. The next year, he put the property -- which also has a racquetball court, seven kitchens, a theater, an elevator, and a waterfall -- on the market for $25 million.
But as he blew $300 million in earnings, Tyson lowered the price to $22 million and then to $12.9 million. He eventually turned the property over to his ex-wife, Monica Turner Tyson, for $1 after a divorce proceeding. She then sold it to 50 Cent for $4.1 million.
So how does an investor take advantage of this kind of scenario? By knowing that a good, cash-rich business can create value where a bad business fails.
Level 3 Communications
Since then, Level 3 has taken Genuity's revenues and migrated them onto its more efficient network, while eliminating some of Genuity's overhead. The long-term effect is that Level 3 may have created a viable business out of lemon. So where the assets may be worth $0.40 to Genuity in a sale, they may be worth $1 to Level 3.
Harrah's Entertainment
The lessons here:
- If a business is a lemon, stay away from it no matter how cheap it is. In other words, don't invest in Mike Tyson, no matter the price.
- Cost of revenue and cost of capital may represent powerful competitive advantages.
- Cash is king.
Jeff Hwang owns shares of Level 3 Communications.