Retail Investors in the Transition

Today: The broken relationship between stocks and retail investors, Trump in the flow, Tencent, Nikola.

The Agenda 👇

• The past: local news about the local stock market

• Why it’s become completely irrelevant these days

• A reading list on how retail investing has changed over the years

• Trump in the flow: some think he indeed is 😱

• First, TikTok, then, Tencent, then every gaming startup in the world

• Going from faking it to making it

As a teenager, I listened to the radio a lot. And because it was the late ‘80s and early ‘90s, it was all in French (no Internet). In particular, there were these frequent snapshots of the stock market—but mostly the French stock market 🇫🇷 It would typically go like this:

The CAC 40 has been sliding a bit. Schlumberger is up, but LVMH is down, while Air Liquide is stable. And now, let’s have a quick look at what’s going on in the rest of the world: the Dow Jones is up, the Nikkei is down. And that’s it! Have a good day.

Needless to say, I never really understood the point of it all. Why only three indexes (the CAC 40, the Dow Jones, the Nikkei)? Why only this handful of companies? What does it tell me about the economy?

It all makes even less sense nowadays. You can still listen to more or less the same sort of things over the French radio, but here’s what has changed over the past few decades:

• Many of those prominent companies are not French anymore. LVMH is still part of the CAC 40, as is Air Liquide. But Schlumberger is long gone, having become a Houston-headquartered behemoth in the oilfield services industry. 

• Even those listed companies that are still headquartered in France now operate at a global scale. With most of their assets, functions, and risks located elsewhere, it’s become difficult for a French investor to understand them based on proximity.

• The geography of value creation has been shifted far away from Europe in particular and the Western world in general. As a result, what happens on stock exchanges in Paris or even London doesn’t particularly reflect the state of the global economy.

• We all get more news in English, directly from the source (for me: The Financial Times, Bloomberg, Fortune). Meanwhile, local sources have become superficial and/or irrelevant. Even French CEOs care more about analysts in London than investors in Paris.

• One problem that comes with English-speaking sources is that they keep on mentioning “the stock market”. Indeed, it takes some time and attention to realize they’re only talking about the US stock market—which is insulated and different in so many respects.

• In any case, almost none of the things that come with the shift toward the Entrepreneurial Age is happening on any stock exchange, except maybe for New York and Shanghai. (The rest, such as small European tech companies being listed in London or Amsterdam, is anecdotal.)

• The radical change at the macroeconomic level since the financial crisis in 2008 has displaced stocks as representative of the state of the economy. As Robin Wigglesworth and Jennifer Ablan wrote last year in the FT, “bonds have become stocks and stocks have become bonds”.

• And then there’s the rise of indexing, with active stock pickers being marginalized in the public equities market and most of our exposure to the stock market now happening via passive investing behemoths such as BlackRock and Vanguard.

My point is not that there’s no point in sharing information about what’s happening on local stock exchanges. Rather it’s that I don’t see what retail investors can get out of it these days:

• Most things that generate returns right now is beyond their grasp: that includes private companies, all of venture capital, more sophisticated approaches such as fixed-income assets, shorting stocks.

• To the extent that ‘the stock market’ generates returns (and it does), passive investing makes it possible for anyone to get their share, all without paying the slightest bit of attention to what’s happening with some specific company on some specific stock exchange.

• As for stock picking/day trading, it’s now possible to do without any fees, but why would you embrace this approach, trying to beat the market when you can simply put your money in a passive investing vehicle? It simply doesn’t work.

• In general, there’s a high dose of cognitive dissonance between what we’re all hearing/reading about equities markets, and what is effectively within our grasp. Because of financial regulations and market imperfections, most investors are effectively cut out of the real game.

Meanwhile, here are a few interesting trends:

• Financial research is being commoditized. Now you don’t need to pay a lot of money to access cutting-edge research. If you want access to the figures, there are plenty of solutions. If you want thought-provoking ideas, you can subscribe to Byrne Hobart’s The Diff. 

• In fact, professional investors have so few comparative advantages left in terms of access to information, they’re reduced to redeploying their capital in more opaque and inaccessible private markets, or to try and follow the little guys in (US) retail investing 😅

I’m planning several rounds of thoughts on this topic because I think it’s an important complement to reflecting on the Diffraction of Venture Capital. One day, when VC has become banal and ubiquitous as a result of software eating the world, we’ll all have to learn to become LPs in rolling funds!

The comprehensive reading list is below but I’ve been particularly interested in this article: What happened when I tried to short the Dow with my 401(k):

I was placing this trade [shorting the Dow] to be more conservative. I was worried—I think justifiably—that the market would take a significant fall, and I wanted to protect myself from it. I was moving about a fifth of my account from a variety of bullish investment funds to the most general of bear funds. But to do so I had to label myself “most aggressive.” Meanwhile, if I blithely bet that the stock market would keep rising despite the pandemic and mass unemployment, Fidelity would see that as somehow less aggressive.

Among the topics I’ll cover next are fees in investing as well as Logica’s Michael Green’s sharp thesis on indexing and the systemic problems it creates on the stock market. While I’m collecting my thoughts, let me know what you think!

• Unshackle the Middle Class (Scott Kupor, Andreessen Horowitz, March 2013)

• Capitalism Today: Customers as Shareholders (me, European Straits, January 2020)

• What's Happening With the Stock Market? (me, European Straits, February 2020) 

• Policy in a World of Pandemics, Social Media and Passive Investing (Michael Green, Logica, March 2020)

• Everyone's a Day Trader Now (Michael Wursthorn, Mischa Frankl-Duval and Gregory Zuckerman, The Wall Street Journal, July 2020) 

• 401(k) Plans No Longer Make Much Sense for Savers (Aaron Brown, Bloomberg, July 2020)

• The Cautionary Tale of Equity Research (Marc Rubinstein, Net Interest, July 2020) 

• Why The Financial Media Got The Bitcoin Halving Wrong & How Bloggers Are Infiltrating These Organizations (Anthony Pompliano, The Pomp Letter, August 2020) 

• The Inside Story Of Robinhood’s Billionaire Founders, Option Kid Cowboys And The Wall Street Sharks That Feed On Them (Jeff Kauflin and Antoine Gara, Forbes, August 2020)

• Is WFH affecting the S&P? (Ranjan Roy, Margins, August 2020) 

• Wall Street and Big Investors Are Dying to Know What Amateur Traders Are Doing (Sarah Ponczek, Bloomberg, September 2020)

• ‘Going to Vegas:’ Newbie options traders face a reckoning as the tech stock rally fades (Jeff John Roberts, Fortune, September 2020)

• What happened when I tried to short the Dow with my 401(k) (Daniel Brook, Slate, September 2020)

🇺🇸 Trump in the Flow

Having written this short essay yesterday about Trump and the concept of the flow in the current US political context, I find myself with some additional ideas:

• One thing that makes me have doubts about Trump is how he refuses to stretch himself. For quite a long time now, he’s taken refuge in friendly contexts, such as Fox News, his base of crazies, and his entourage of sycophants in the White House. You can spot how lonely and confined he is by the look of the Republican convention.

• Another thing: most of Trump’s personal style has made its way into the mainstream, such as using demeaning nicknames to describe politicians. You would think that to be an advantage for Trump, but not really: now that he doesn’t stand out, he looks as if everything’s easy for him—which means he’s not in the flow!

And I also received objections from subscribers. One of them said that my essay had convinced him Trump would win since he seems to resonate the most with today’s America. Another made the point that Trump’s goal is not to win the election, rather it’s to lose it narrowly enough so as to be able to contest the results and have victory handed to him by a conservative-leaning Supreme Court. 

To that last one, here was my answer (slightly edited): 

I don’t see [Chief Justice] John Roberts betting his legacy on that one. He can pull enough strings within the pro-business side of the GOP establishment: convincing everyone that as long as they have the courts and enough Senate seats, Biden won’t do much harm. Then he will be in a position to convince Justices such as Gorsuch, Kavanaugh, even Alito maybe.

All those are George W. Bush Republicans, after all. They just want the tax cuts (as was well explained by Jonathan Chait in his book The Big Con). They don’t want the crazies, the bad reputation, and the stain in the history books—just less regulations and more tax cuts. Trump has been their useful idiot for a time, but he doesn’t command that much institutional power anymore—especially after the election, when, however contested the outcome, most GOP senators will know if they’ve retained their seat or not, and they can vote as the big guys with business’s interest at heart tell them. No more dreading a primary challenge!

What do you think?

🇨🇳 Today, It’s TikTok. Tomorrow, Everyone?

It’s happening! You all thought Trump would force a TikTok divestment and then stop at that. But now his administration is asking tough questions to online gaming companies that count Tencent as a shareholder. Here’s Bloomberg on that one: 

The Committee on Foreign Investment in the U.S., which is chaired by the Treasury Department, has sent letters to companies, including Epic Games, Riot Games and others, to inquire about their security protocols in handling Americans’ personal data.

I have a longer piece coming up tomorrow about this topic in Sifted. I’ll link to it when it’s published! In the meantime, read this excellent (angry) column by Danny Crichton of TechCrunch:

Hell, we’re apparently demanding a $5 billion tax payment from ByteDance, which the president says will fund patriotic education for youth. The president says a lot of things of course, but at least the $5 billion price point has been confirmed by Oracle in its press release over night (what the tax revenue will actually be used for is anyone’s guess). If you followed the recent Hong Kong protests for a long time, you will remember that patriotic youth education was some of the original tinder for those demonstrations back in 2012. What comes around, goes around, I guess.

🚛 Nikola and Faking It

Some time ago I wrote a piece about how far an entrepreneur can go in terms of, well, lying. It’s an important question: What’s the difference between having Steve Jobs’s reality distortion field and being an outright fraud? Here was the key idea writing the essay led me to:

People in Silicon Valley, with a strong system of checks and balances in terms of just how far “Fake it until you make it” can go, weren’t fooled [by Theranos]. And that is the kind of ecosystem that everyone should be aiming for. Healthy ecosystems don't push entrepreneurs to fake things that will bring harm to anyone; it's on both the ecosystem and the entrepreneurs to not go too far in the faking part.

That discussion has been revived following the recent events surrounding Nikola, the (public) self-driving truck company. (As a reminder, a short seller published a detailed piece of research suggesting they are a fraud, then the founder and executive chairman stepped down.) Alex Danco published an essay on the topic yesterday, Are Founders Allowed to Lie?

You probably don’t call it “lying”, but founders have to will an unlikely future into existence. To build confidence in everyone around you - investors, customers, employees, partners - sometimes you have to paint a picture of how unstoppable you are, or how your duct tape and Mechanical Turk tech stack is scaling beautifully, or tell a few “pre-truths” about your progress. Hey, it will be true, we’re almost there, let’s just say it’s done, it will be soon enough.

---

If you’ve been forwarded this paid edition of European Straits, you should subscribe so as not to miss the next ones.

---

From Normandy, France 🇫🇷

Nicolas