Capitalogix

Here Are Some Links For Your Weekly Reading - January 31st, 2020

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links:

• American is the First US Carrier To Use Digital Health Passport. (Simpleflying)
• Tim Cook On Why It's Time To Fight the "Data-Industrial Complex". (GQ)
• Wikipedia Turns 20. (MorningBrew)
• The 2500-Year-old Technique To Make Ice In the Desert. (Medium)
• The San Francisco School District's Renaming Debacle Has Been a Historic Travesty. (MissionLocal)

 

Trading Links:

• Public Market Verdict: the Unicorn Binge Wasn't Crazy; It Was Really Profitable. (Crunchbase)
• Bitcoin Investors May Lose Everything, Central Banker Warns. (Bloomberg)
• The SPAC Boom Rolls On Into 2021. (MorningBrew)
• FAA Clears Way For Commercial Drone Deliveries With New Rules. (ABCNews)
• Apple Overtakes Amazon To Become World's Most Valuable Brand, While Tesla is the Fastest-growing. (MarketWatch)

Wolves of r/wallstreetbets: What Happened With Gamestop & Robinhood

GameStop has been on a steady decline (both as a stock and a company) for many years. It has been like watching Blockbuster get replaced with Netflix all over again.  Why would people go to a retail store when they can consume a wider range of products from the comfort of their home?  Obviously, the pandemic made things worse for them.  As a result, short sellers lined up to bet on their demise.

So, how can you explain the jump in GameStop's share price from $17.50 at the beginning of 2020, to almost $400 on Thursday?

You could argue it started with new leadership from Ryan Cohen and their surprisingly stable financials despite the turmoil. Nonetheless, it would be hard to justify a sudden $28 Billion dollar valuation based on that alone. 

The real reason for the price jump, and the story everyone is talking about, is the war of the retail investor (fueled primarily by a Reddit forum called r/wallstreetbets) on Wall Street. 

 

It's a complicated situation, and news stories tend to have their own biases and agendas, so I thought I would bring you up to speed on what happened, the legality, and the potential ramifications.

What Happened?

Earlier this month, Redditors realized that GameStop's stock ($GME) was shorted to 140% of tradable shares due to positions by several funds including Melvin Capital. Most of those positions are passively held, so the short-interest accounted for 300-500% of the float (actively traded shares).  Theoretically, this shouldn't be possible - but it was allowed by the brokerages and market makers. 

This allowed the Redditors, and other retail investors, to buy the stock aggressively, raising the stock price, and forcing the shorts to cover. This is called a short squeeze. 

By Wednesday, retail investors' actions raised the price 700% to over $300. Melvin Capital was out ~3 Billion dollars and ultimately got bailed out by Citadel and Point 72. 

On Thursday, after calls for help from Wall Street grew louder, several online brokers blocked the buying of GameStop and other stocks that were trending on Reddit (like $AMC, $NOK, and $NAKD) and canceled some trades. Those brokers still allowed users to sell their shares.

 

via Statista

The stock price of GameStop and AMC tumbled as a result and the media went into an uproar.

Questions of legality were raised toward the potential market manipulation of Robinhood, but also r/wallstreetbets. 

Were Robinhood's Actions legal?

Separate from legality, the optics of the situation are very bad for Robinhood. First, Citadel, who bailed out Melvin Capital, is one of Robinhood's vendors. Second, Robinhood's motto is about access to all, and it heavily markets brand beliefs consistent with the ideals of the fictional heroic outlaw, Robin Hood (who took from the rich to give to the poor).

Voices like Mark Cuban, Elon Musk, AOC, and Ben Shapiro all came out against Robinhood for limiting retail's ability to trade. An odd show of unity in these divisive times. There are also several class-action lawsuits and the SEC is reviewing the situation.

Robinhood justified its actions by claiming they were forced due to increased volatility, and risk management with their brokers. Both Robinhood and Citadel strongly denied any market manipulation claims.

Legally, these brokers state in their contracts that they are allowed to restrict trades for almost any reason. As well, they have liability and protection obligations to their consumers, market makers, and clearinghouses.  

The situation with $GME is undeniably risky. Trading is a zero-sum game, and for every crazy win story you see of someone paying their mortgage, someone is losing their house. As $GME gains popularity, or r/wallstreetbets tries to replicate this success with other securities, the late majority are (almost by definition) going to be the least qualified and the most at risk of losing money they probably can't afford to invest. 

This episode shined a light on clear issues with the Stock Market. 

However: 

• Robinhood only limited the ability to buy these stocks, which by design lowers stock prices.
• Before retail investors capitalized on the situation, these same brokerages let institutions short 140% which would have been a death sentence for GameStop. 
• It's on the NYSE (in this case) to shut down the trading of a security, and they only do it for fraud or if there is material information a company hasn't disclosed yet.
• The timing and relationships bring good reason to question the validity of Robinhood's statements.

While the theoretical action of limiting trading is legal for Robinhood - this specific case is questionable at best. 

Were r/wallstreetbets actions legal?

Many big-time bankers have been arrested for market manipulation in the past. It's a point of many of the regulations in Wall Street today. 

This specific example is very complicated. On Reddit, a public forum, many users urged each other to buy stock and to hold in the face of adversity. The initial logic behind buying $GME was based on solid fundamentals, and the observation about Melvin Capital's position - but quickly became a momentum play capitalizing on the mania. You could argue it was collusion, which is bolstered by the disparity between the future value of GameStop as a business and its current stock price.

It's hard to prove that there was a coordinated effort to manipulate stock prices here. To me, it looks like a mob of uninformed investors following the advice of an educated investor and creating a trend. A common theme. Some claim it resembles a classic "pump-and-dump" scheme that you would find by the likes of Jordan Belfort and the penny stock market.

I think it's very unlikely you see anyone charged here - but I do think it's likely you see new regulations as a result of this. 

While the industry is already heavily regulated, the world is changing, and we have to keep up or deal with the consequences. 

New strategies or capabilities push boundaries and test limits in new ways.  In the short term, someone has a new advantage, but in the long term, the system evolves and gets stronger.

The Bigger Picture

I've seen many people concerned with the decision-making behind retail's investment in $GME.  As a practical matter, it doesn't really matter. 

The initial posts on Reddit showed a good understanding of fundamental trading, but most traders who followed that advice wouldn't know the difference. 

I'd argue it's not that different from most of Wall Street. Many don't have an edge, they simply piggyback off of the success of the ones that do, whether by following their trades or starting a new firm with the lessons they learned at a bigger firm. 

The market is not the economy, and while GameStop is a great case study to prove that, at its core, it's not really a unique or new phenomenon. 

Value is an important part of a stock price.  But for many speculators, it is only part of the calculation. And beyond speculators, there are many types of market participants (e.g., governments, institutions, hedgers, etc.) and reasons to buy or sell things (including fun, excitement, a social belief, etc.), and rationales for their decisions (including systematic approaches, momentum, reversion to the mean, etc.) that combine to form the free market. 

A free market isn't necessarily a smart market ... and it doesn't need to be. But, part of what creates a growing and thriving market is the belief that it is safe, reasonably transparent, and reasonably regulated. Consequently, I would expect regulators to re-visit this and for them to re-look at the regulation of margin and other things. 

Expect increased volatility and noise. Expect more runs like this. Plan accordingly. 

Conclusion

Helping the average person take advantage of the Stock Market is a good thing. With that said, the "democratization of access" comes at a time when tech asymmetry is growing. The advantages to Hedge Funds and Institutional Investors are growing - regardless of regulation - due to better tech stacks, smarter algorithms, and teams of PhDs. Information asymmetry is decreasing, but data is only valuable if you can digest it.

The Stock Market is not just a game, and some believe it's worrisome that some retail investors feel like it is. 

In trading, there is a rule of thumb that says a trend continues until it stops.  Well, expect the bubble to pop for $GME (and the other stocks that may follow this pattern).  Why, because trends do stop ... and to quote Stein's Law - if something can't continue it won't.

Actions have consequences.  Many intelligent investors will be fine, but many other investors will be hurt.  To some extent, that is the consequence of a zero-sum market.  But with Democrats in power, I expect to hear more about this.

Perhaps it shouldn't have taken Wall Street getting hurt to start this discussion. Now the discussion has started.  At some level, it's not about what happened ... it is about what you do. 

It's unclear whether r/wallstreetbets will have the win they're looking for or whether Robinhood will get penalized. 

What do you expect to happen?

Using Lenses To Create Finer Distinctions

Wisdom comes from making finer distinctions ... but that only happens after bringing some order to the chaos.

I find myself relying on those ideas often because they have proven themselves in so many different situations. 

There are many ways to create finer distinctions.  I shot a video that shares a couple of examples of how "changing the lens" you use to look at a problem helps you see and solve things differently and better. 

Enjoy the video here.

Learning to ask the right questions, change timeframes, and assess how you can best use emotions to identify key opportunities and challenges are all ways that will help guide you through uncertain territories.  The video goes through these (and a few other techniques) that you can use as a catalyst to your thinking and planning.

It is easy to underestimate the value of a good idea.  Sometimes, it only takes one to change everything.

Hope this helps.

Let me know what you think.

Here Are Some Links For Your Weekly Reading - January 24th, 2021

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links:

• Meet the Man On a Controversial Mission To Preserve and Digitize Your Brain. (DigitalTrends)
• What is Consciousness? Scientists Compete To Find Out. (Bloomberg)
• Balinese Temple Monkeys are Sophisticated Thieves and Negotiators. (Economist)
• How Predictive Algorithms are Transforming Data Into Decisions. (JeffBullas)
• What is AI? The Human's Handbook to Computers that Think. (MorningBrew)

 

Trading Links:

• The Stock Market is At or Near the Most-expensive Levels Ever By Most Measures. When Will It Matter? (CNBC)
• Stock-Market Bulls Brace for Major Gut Check as Earnings, Fed and GDP Loom. (MarketWatch)
• David Einhorn Warns of Danger From Valuation-Indifferent Investors. (Forbes)
• How VCs and Founders See 2021 Differently. (TechCrunch)
• Virtual Reality Will Be a Trillion-Dollar Marketplace Within Five Years – Here's a Good Example Why. (MW)

 

Jim Simons and Renaissance Technologies

Jim Simons is a mathematician and cryptographer who realized that the complex math he used to break codes could help explain financial patterns – and he made billions with those ideas in his notoriously secretive hedge fund firm called Renaissance Technologies. 

As of January 2021, He has stepped down as chairman. Now, Peter Brown, the former CEO of the fund, has stepped up as chairman.

With Jim stepping down, I thought it was worth looking at the legacy he has left on not just the Hedge Fund industry - but on trading as a whole. 

He is famous not only for the duration of his success and the size of his results … but also for the way he made his money (with much lower volatility and risk than his peers and competitors). 

His background is impressive.  Simons taught at Harvard and MIT and worked with the NSA.  Here is a video where he shares some thoughts in a 2015 TED talk interview.  It's worth a watch. 

TED via Youtube

Despite advanced math still being a mystery to many,  we rely on it more than ever as the foundation of many exponential technologies.

The Heart of AI is Still in Humans

Simons built a team of mathematicians whose motivation was doing exciting mathematics and science (rather than hired guns who could be lured away by money or pure trading quants, biased by the industry).

This hits on something important. 

Humans are still important ... and companies that pursue exponential thinking and exponential technologies still have to champion integrity, culture, and purpose.

 

Better Math is a Competitive Advantage - So is More and Better Data

We stayed ahead of the pack by finding other approaches and shorter-term approaches to some extent … but the real thing was to gather a tremendous amount of data

– Jim Simons

On top of his intelligent hiring and novel approach to trading, Jim Simons recognized that an impressive data pipeline - and the technological infrastructure to digest and analyze that data was a moat to competitors. 

It is hard to have an edge if you use the same process and the same data as your competitors.

As the flywheels of commerce spin faster, edges will emerge and decay faster.  Finding a solution is only a step in an ongoing process.  

Robust, reliable, and repeatable innovation at scale is a meaningful competitive advantage.  That implies that idea factories will become as important (if not more so) than factories that produce material products.  Likewise, innovation funnels will become more important than sales funnels. 

The world changes at the speed of thought ... and as technology continues to improve ... even faster.

Onwards!

Where Do We Go From Here?

Yogi Berra once said, “It's tough to make predictions, especially about the future.”

I don’t normally post articles where I predict things. Nonetheless, I feel the need to comment on what is happening in America and what I suspect happens next.

My political beliefs are not really important here. But for context, I am somewhat fiscally conservative and somewhat socially liberal. It puts me pretty squarely in the middle.

As an entrepreneur and citizen, I feel compelled to find the "signal-in-the-noise" to understand and anticipate the game that’s being played, what the playing field looks like, and the best way forward.

For all the front stage calls for "unity & healing", behind the curtain, the actions of both sides aren't supporting the words they're saying. 

When the Democrats first announced the second impeachment, I assumed it was designed to steal news cycles (a nice trick that Trump taught them) and time cycles to minimize potential damage till the inauguration. Meaning that any time they forced the Trump administration to spend discussing what was happening or defending themselves was time taken away from political gamesmanship and last-minute actions that the new administration would have to deal with later.

Meanwhile, perhaps the reason Mitch McConnell has been sending mixed signals about protecting Trump is to avoid angering a meaningful portion of his base – while preparing to create the space to launch his new post-Trump Republican leadership slate (and a powerful Trump hurts those plans).

Ultimately, however, I do not believe that either party really wants to pursue impeachment fully at this point. Consequently, I suspect that the Biden administration will slow down the impeachment (and morph it into other strategies and tactics). I can’t imagine that the new administration will want to give Donald Trump even more of a public forum to broadcast his messages to the whole world (considering what's happening with Big Tech removing his platform).  It makes more sense to move on and shift focus.

Strategically, it seems more likely that they’ll go for a censure. With that, I suspect that they will attempt to strip post-presidency benefits and courtesies (including financial, access, and information).  Further, it wouldn’t surprise me if they find a way to prohibit him from having any public lands or things (like airports) named after him. This would accomplish three things.  First, Democrats would consider it a win and a signal to the world.  Second, it would hit Trump where it hurts (in his ego and legacy). Third, it would also support the new Republican leadership's goals by minimizing the chance that Trump could limit McConnell's power or fracture the party further.

Consequently, the real attempts to prevent Trump (or his family) from running for president will be accomplished via felony charges out of places like New York, Georgia, or DC.  Even though the motivations may be political, I don’t think it will be a political process.  Kind of like what they did to Al Capone.  That means that I expect both parties to help various prosecutors keep Trump busy, weaken him, and limit his future impact.

As for the markets, to some extent, what goes up must come down. The pendulum swung pretty far and was propped there for longer than most thought possible. Clearly, we are due for a correction.

Global economic weakness (and falling GDPs), along with the pandemic (and challenges with a vaccine rollout), will all contribute to short term volatility.

However, I think the Democrats will be far less committed than Trump was to propping markets up in the short term. They would prefer any reversion to the mean to happen quickly – so they can blame it on the prior administration.

With that said, the midterm elections are coming up quickly (and control of the Senate likely to be an even hotter topic). Consequently, I expect the Democrats to push hard to help the markets recover coming into the end of their first year.

Of course, all of these thoughts are speculation and may not come true. 

I’d love to hear your thoughts.

We certainly live in interesting times.

Here Are Some Links For Your Weekly Reading - January 17th, 2020

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links:

• Are Humans Smarter or Stupider Than We Used To Be? (Freakonomics)
• Inside Twitter's Decision To Cut Off Trump. (New York Times)
• Robots Turn 100 and Still Enthrall Us. (Wall Street Journal)
• From Good To Great: How the Flywheel Can Be Your Company's Next Big Thing. (Entrepreneur)
• Clever New A.I. System Promises To Train Your Dog While You're Away From Home. (DigitalTrends)

 

Trading Links:

• An Old Foe of Banks Could Be Wall Street's New Top Cop. (Wall Street Journal)
• The 'Black Swan' Covid Catastrophe Shows Us Just How Fragile Our World Is. (TheGuardian)
• The Five Biggest Issues For Technology Companies In 2021. (WSJ)
• 5 Charts Show What the Global Economy Looks Like Heading Into 2021. (CNBC)
• 'I Don't See Anything On the Horizon that Can Stop the Growth of the ETF Market,' Invesco Official Says. Here are Her 2021 Predictions. (CNBC)

 

Elon Musk Is The Richest Person In The World

On the 7th, it was announced that Elon Musk's wealth passed Jeff Bezos's $185 Billion net worth to become the wealthiest person in the world. This is driven by Musk's many companies - SpaceX, The Boring Company, OpenAi, Neuralink, and of course, Tesla.

That valuation comes after Tesla's market value passed $700 Billion for the first time. His company is worth more than Toyota, Volkswagen, Hyundai, GM, and Ford combined (despite not having nearly the distribution) based on Market Capitalization.

via EEAGLI

NIO, BYD, and Xpeng should be on the list, but their market cap has increased so rapidly it seems the list used missed it. 

With Tesla's almost meteoric rise, it raises the question of whether the value is based on the ongoing global expansion, or speculation driven primarily by traders believing other traders want it as well.  To put it in perspective, Tesla's revenue has been rising 50% a year, which is impressive, but the stock has increased 800% in a year. Its P/E ratio is over 1400. As well, Tesla's revenue is less than a tenth of many of the companies on this list - and many of the companies are launching their own electric vehicles. 

To better compare the companies, a much better test is enterprise value which takes into consideration the company's debt obligations. 

via Radiatin

This shows that Tesla is still very impressive - just slightly less impressive than the markets would have you believe. They have clearly taken on less debt than many of those companies, and their market cap likely helps them take on cheaper loans when they do pursue more debt. 

I have a lot of faith in the future of Tesla as a company - but as a reminder, at the height of the 1990s tech bubble, Yahoo was worth more than all of the newspaper companies in the US. Toyota alone brings in 10x the revenue that Tesla currently does, and manufactures 25x as many cars. 

Regardless - congratulations to Musk for the achievement. If you were curious how he intends to use his "newfound" wealth, Musk is committed to using his money for two major goals 1) Sustainable energy and 2) extending life/consciousness beyond Earth. 

I guess you have to shoot for the stars ... or at least planets.

Language Is A Limitation

Man acts as though he were the shaper and master of language, while in fact language remains the master of man. - Martin Heidegger

Words are powerful. They can be used to define reality, obscure reality, or create reality. Words can be constructive or destructive ... uplifting or demoralizing. 

In a sense, the power of words is seemingly limitless.  But that power cuts both ways. Language is also the cause of many of our problems. 

We created language to aid social interactions and to facilitate our understanding of the world.  However, language also remains a constraint in how we perceive the world and a limitation on our understanding of new things (e.g., ideas, advances in technology, etc.).

Before I go into where language fails us, it’s important to understand why language is important.

Language Facilitates Our Growth

Because without our language, we have lost ourselves. Who are we without our words? – Melina Marchetta

 

 

Language is one of the major keys to advanced thought. As infants, we learn through watching our environment, reading faces, and learning to infer things from body language. As we begin to understand "language," our brains develop faster.  In this context, language isn't limited to the spoken word – intelligence grows with the catalyst of language, whether it's vocalized or not.

It's this ability to cooperate and share expertise through language that has allowed us to build complex societies and advance technologically – but it is becoming an increasingly inadequate tool as the world becomes more complex.

Language as a Limitation

When it comes to atoms, language can be used only as in poetry. The poet, too, is not nearly so concerned with describing facts as with creating images. -Niels Bohr

In Buddhism, there's the idea of an Ultimate Reality and a Conventional Reality. The Ultimate Reality is the objective nature of something, and the Conventional Reality is tied inextricably to our cognition – heavily influenced by our language.

Language conveys cultural values and biases, personal values and biases, and influences how we perceive “reality.” Linguistic differences create a wedge between various political groups – even when people probably want similar things.  In these cases, differences in language and perception create strife (rather than define it). 

 

 

We use language and our past to sift and categorize existence into heuristics instead of exploring the true nature of things (in part because if you're trying to survive in the jungle, shortcuts increase your chance of survival by saving time and energy ... and accuracy is secondary to survival). 

On the other hand, when you're trying to expand the breadth and depth of humanities' capabilities, those same heuristics become shackles (or at least blinders). Ultimately, they can lead to issues like groupthink and echo chambers that limit not only innovation but communication. 

Look at groups like Democrats v. Republicans or Israelis v. Palestinians. In reality, there are more similarities than differences. Nonetheless, on a day-to-day basis, each of them focuses more on their differences than finding collaborative solutions for life's tougher problems (or focusing on the things they do agree upon).

Throwing rocks at our enemies also counterintuitively makes us feel better and promotes in-group unity. The problem is it comes at the cost of progress and true unity. 

This is not to say that there aren't real (and important) differences between those groups. It simply recognizes that part of the problem is our willingness to accept "get-to-next" compromises rather than seeking understanding and committing to coming up with real and complete solutions.

Humans Are The Real Black Box

But if thought corrupts language, language can also corrupt thought - George Orwell

People often refer to Artificial Intelligence as a "black box" - because the complexity and coding of the algorithms, etc. make it mysterious to a layman. But, Artificial Intelligence is programmed; it is precise and predictable. It is only influenced by the coding used to create it and the data fed to it; this creates its own form of transparency (and bias). 

Meanwhile, humans are nuanced and (to some extent) non-rational creatures. We’re prone to cognitive biases, fear, greed, and discretionary mistakes. We create heuristics on previous experiences, and we can’t process information as cleanly or efficiently as a computer. 

When humans explain their own behavior, they’re often inaccurate - what we hear is more likely a retrospective rationalization or confabulations than a summary and explanation of the choices they made.

All-in-all, it results in a lot of confusion in trying to understand world events, each other, and even ourselves. 

Conclusion

I have friends on both sides of the political divide in America, and once you get past the rhetoric - there's a lot more in common than it seems. Excluding extremist groups, most are looking for unity, the "truth", and solutions to the problems in front of us.

Conflict is often a symptom, not the disease.

On a smaller scale, inside my company, I focus on creating a universal lexicon for our "intellectual shortcuts" because alignment starts with shared understanding.  If the language I'm using means something else to another team member, even if we think we're moving toward the same goal, we'll slowly stray further and further apart. 

As a practical matter, spending too much time moving away from each other (or measuring the distance we are from each other) creates a self-fueling irritation that becomes increasingly annoying, and ultimately caustic. 

Today's problems can't be fixed purely with semantics and semiotics, but they are not bad places to start. 

If we start from a place of agreement and common desire to pursue something worthwhile, the distinctions will call us forward rather than pull us apart.

I hope this helps.  Let me know what you think!

Google's Year In Search

While 2021 already feels like a long year – taking a look at the search trends from 2020 reminds us how much we can pack into a year.

Google tracks the terms people search for using its platform.  Over time, the data about what people search for (and how many people are searching for it, and how long that topic stays relatively interesting to them) is interesting in and of itself.

An infographic like this is interesting and valuable as a normalized contextual map of the "shock" and "awe" ripples felt by humans as a result of events (real or imagined) that happened around them.  

It's worth noting that each graph is on a 100% scale, so "Death" having no drop off means it had a relatively consistent search history throughout the year. 

The visualization is in chronological order to help highlight major events as they happened in 2020 (which is different than presenting the most searched terms in rank order). 

 

via Roshaan Khan

The only constants were death, Tesla, and TikTok ... sounds about right. 

It might be interesting to see a similar graph of the relative air-time given to topics on various news sources (e.gl, Fox News, MSNBC, Breitbart, NYTimes, WSJ, Washington Post, etc.).  The comparison of the word cloud, the intensity, the frequency, and the duration of the coverage would be interesting as well.  So would a comparison of your social media news feed to your choice of news source.

On a different note, as I think back on last year, what's really crazy about this list is how many major events didn't make it (for example,  the wildfires, the Hong Kong protests, murder hornets, nuclear threats, cyber-attacks, Zoom, market crashes, etc.).

The data is also somewhat biased.  While this is a global list, it's clearly dominated by India and the USA. That has a lot to do with the tech stack populations are allowed to use.  Remember that countries like China, Russia, Iran, and North Korea prevent their citizens from using the same "Internet" that we use and "encourage" them to use approved tools to surf, chat, or search. As such, their searches didn't impact Google's findings fully.

you want to see more about this, Google put together a video and a more comprehensive list. 

Best wishes for a great 2021.

Onwards!