Byrne Hobart
This is the once-a-week free edition of The Diff. What you missed in the last week:
Why every public company is converging on the same interest rate bet that banks make, and what it means for bailouts.
The challenge of running a “pandemic fund” is not that it won’t work—it’s that by the time it works, most of the capital is gone.
How cropped screenshots of tweets showcase Instagram’s virality—and demonstrate a useful UX rule.
The “Long Deflation,” broken price signals for consumer goods—plus Zoom’s massive reputational bug bounty.
Investing as a Rationality Dojo
The most healthy, functional online communities I’ve encountered are centered around lifting weights, playing strategy games, and investing. What these fields have in common is that progress is quantifiable, but it’s not adversarial: the vast majority of participants are not in the field’s elite, so everyone’s competing for Nth place where N is an unimpressive number. They are, in other words, communities in which 1) there is such a thing as definitely being helpful, but 2) there’s no such thing as helping someone beat you.
I’m a lurker in fitness forums (I am in no position to give advice) and in strategy game forums (a dangerous addiction). But I do have avid debates about investing.
Conversations about stocks, strategies, risk-management, macro, etc. have a really interesting dynamic: the polite way to express interest in continuing the conversation is a detailed form of “Here’s why you’re completely wrong.” If someone rattles off a trades they’re excited about and why, a nod of agreement is actively rude. There are a few reasons for this:
Every trade has a counterparty, so every bet on one narrative is implicitly a bet against another narrative. Since it’s always easier to understand your own side’s point of view, the counterpoint is necessarily more information-dense. Either the case is persuasive, and you need to make some hedging trades, or it’s not, and you can increase your position because you’re confident you know the flaws in the other side’s argument.
While there are distinct schools of thought among investors, they’re less durable and less pathological than in other fields. For example, Republicans and Democrats strongly agree that justice requires us to redistribute wealth to high-turnout demographics concentrated in swing states, especially in election years. Whether this is done in the name of freedom or equality is kind of moot. Either way, they find lots of reasons to fight even when they agree. Investors have schools of thought, too, but they’re much less durable; some value investors evolve into growth-at-a-reasonable-price investors when all the cheap stocks get snapped up; quants override their models when reality is out-of-sample; growth investors eventually ask questions like “how many years of 50% revenue growth does it take for this valuation to look reasonable?” and while Buffett is ostensibly a Zen master who only looks at valuation and doesn’t bother with market psychology, every single preferred stock deal Berkshire does is a masterpiece of exploiting psychological weaknesses. Some people suss out market psychology with charts and weird analogies, some people do it with folksy phone calls that end in a brutal ultimatum, but everybody does it.
The market penalizes being persuasively wrong over being boringly right. If you’re long a stock and you have a clever response to the bear case, you might be okay, but if you have a witty response you’re going to blow up.
Anyone sufficiently well-informed to argue against an investment thesis is implicitly a member of the Smart Money Fraternity. Sensible bulls and sensible bears can unite in their contempt for the low-information trader.
Everyone’s incentive is to find the crux of the disagreement, and then figure out how we’ll know which side is right. If you’re short a company right now because you know they’ll run out of cash by year-end, and can’t raise money before then, the person on the other side of the trade expects them to raise money. Which means that if they do announce that they got a loan, even at punitively high rates, it’s your duty to grimace and cover your short. Ultimately, any debate about an investment that isn’t pure banter is going to turn into a joint effort to find a catalyst that will prove one side or another right. Instead of disagreeing for thirty years running, like some TV talking-head, you find a way to resolve who will be right in a quarter or two.
Banter among investors takes a weird form. A phenomenon I’ve noticed is that the better someone’s track record, the more likely it is that the trades they will talk about are a) new ones, or b) bad ones. Finding out they’re actually doing well this year is like pulling teeth; you have to do a brute-force scan of their investable universe before you finally get them to admit that, ok fine, they bought Carnival puts when it was at $50. This seems to be a habit good investors develop as a crutch: winning trades don’t teach you anything, because your assumptions were right, so you do all your learning either before the trade or after a painful loss.
All these factors makes investing a great way to develop good habits about other kinds of predictions. Political pundits make all sorts of dumb arguments, and stay entrenched for longer than they should. As Paul Graham has noted, the reason they’re getting shamed now is that 30% daily growth made the mistakes immediately and painfully obvious. But the fact that most pundits don’t make such predictions tells you there’s something terribly broken about the system: if you can’t be wrong, can you really be right?
It’s hard to develop good truth-seeking habits. Assuming today’s consensus views on big issues (religion, human rights, political arrangements, social arrangements) are right, being right about them at any point in the past was incredibly dangerous. A more practical skill is to be conventionally wrong. But if you are concerned with being right—not just correct about specific things, but training yourself to be consistently right the way you’d learn a sport or instrument—you can’t do better than to put on some trades, get into some arguments, and learn what you’re wrong about.
Covid-19 Updates
First, fastest: Fast Grants are $10k-$500k grants supporting Covid-19-related projects, with 48-hour approval time. The target recipients are narrowly defined (PIs at academic institutions who are working on something relevant and currently cash-constrained), but that’s a good way to put a lot of money to work. Some Of Fast Grants’ funders have previously expressed an interest in unusually fast projects, so I’d treat those constraints as useful ones if you’re speedrunning a Covid-19 cure.
Internet infrastructure continues to hold up despite unprecedented demand. Microsoft cites a 200% increase in video chat time-spent since March (note that Zoom cited a 20x increase from December). Meanwhile Akamai says it’s the biggest increase in traffic they’ve ever seen.
Residential electricity usage patterns are shifting, with higher-than-usual peak power consumption. 6pm was already a peak time for electricity consumption, so a peakier peak is interesting: it means that lockdowns should increase residential demand for natural gas, although the balance between higher peak residential demand and lower average commercial demand is harder to determine.
For VCs, bandwidth, not money, is the limiting factor. This bodes well for funding in the near future, but not today: dry powder will still be available in a few months, once portfolios have been pruned down to likely survivors.
Advertisers are filtering out Covid-19 content, which is the main driver of news traffic growth, which is seriously compressing news site margins.
Elsewhere
Non-Dilutive Funding Update
Clearbanc has launched a new product, “Runway,” which offers quick loans to small businesses. Clearbanc has previously done some very interesting work in a narrowly-focused credit product: lending against high-ROI ad spend, and then helping borrowers optimize their spend. This is part of a general trend of software companies and PE companies performing similar roles, with economic convergence as well: a loan that scales with the growth of the business has similar convexity to equity (i.e. if the business doubles in size, an equityholder’s position naturally doubles; if the lender doubles the size of their loan, their exposure has the same convexity).
Paradigm Shifts or a Zipf Distribution?
Reaction Wheel has an excellent cross-disciplinary look at whether productivity growth comes from discrete innovations or from continuous improvements, and finds strong theoretical and historical evidence for a continuum. There are some inventions that are important enough to change everything, but the distribution of invention frequency-times-impact is not bimodal. As it turns out, progress is incremental. It’s just that the increments vary.