“On Bullshit in Investing”

Benn Eifert, managing partner of San Francisco hedge fund QVR Advisors, has published a guest post on Noah Smith’s Substack site, “On bullshit in investing”. There is a great deal of timeless wisdom in this short piece.

[A]s Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.”

The recent sell-offs in equity markets and the crypto sector have revealed a lot of naked former “investment geniuses”. Eifert notes:

The investing industry is ridden with bullshit. The most common and insidious form is over-optimism: offers of tantalizing risk/reward that defy any notion of reality, often based on misinformation or deception. Less common but even more dangerous are outright frauds.

The problem is inherent to the product. Most consumer goods – apples, hotel rooms, laptop computers – are tangible objects or services that you can see, taste, feel, or experience, so you can judge how much they are worth to you. Investments represent claims about some future probability distribution of monetary outcomes which are not literally verifiable. The best an investor can do is form a reasonable judgment about the uncertainty around those claims, based on historical evidence and details about the mechanics of how those claimed outcomes are generated.

The packages can be familiar, fresh, or exclusive. Highly speculative futuristic investments are wrapped in ETFs or SPACs. Ponzi schemes are dressed up as sophisticated options strategies (Madoff) or technological revolution (Terra/Luna). Sophisticated institutional hedge funds masquerade as arbitrage when they simply sell catastrophe insurance. Both retail and institutional investors are targets.

He cites some notable examples.

However, this inherently ambiguous futurism also lends itself to bad behavior. For example, mutual fund manager Cathie Wood claimed that ARKK’s research showed imminent breakthroughs in artificial general intelligence could accelerate GDP growth from 3-5% per year to 30-50% per year. This is preposterous; the fastest sustained economic growth rates in any country in history are closer to 10%, or close to half that for advanced industrialized nations. Meanwhile, she projected compound rates of return over 50% for her portfolio of popular speculative technology companies, presumably in part based on research like that AGI bit. For a five-year period this implies a 7.6x gain, wildly implausible on an ex-ante basis. This is an example of wild over-optimism and misleading or deceptive investor information. Her mutual funds have generated hundreds of millions of dollars of risk-free fee income for herself while destroying billions of dollars of investor capital in abysmal dollar-weighted returns. Meanwhile, investor inflows into ARKK have continued at a rapid pace.

The Allianz Structured Alpha funds managed tens of billions of dollars of money on behalf of conservative pension funds and foundations. They ran a complicated option-selling investment strategy purported to produce equity-like returns with low risk, hedged against a market crash. The strategy generated considerably higher total returns than any comparable limited-loss option selling strategy like the CBOE CNDR Index. It turned out they were using leverage and simply lying about buying insurance against a market crash while providing doctored risk reports to investors and management. The fuse was lit. They blew up spectacularly in March 2020. The key warning was a complex strategy delivering much better results than reasonably expected based on its description, without performance attribution data that could possibly have been reconciled. The most unsettling part of this horror story was how such a large scale deception could occur under the nose of trusted brand-name asset management firms.

Read the whole thing.

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We just need some additional regulations and a few thousand more staff at the SEC and this will stop. If there is a public outcry, there will be hearings with clowns and perps sitting high on their benches asking stupid questions. Maybe they will bring back a reddit poster. Who knows. Except it won’t be a party contributor.

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I used to regularly read the posts and comments on Victor Niederhoffer’s site. Victor has great cryptic(at least to me) nicknames for people. Hillary is “the cattle trader”. Soros is “the palindrome”. There are several I have not figured out.

Anyway, inspired by Victor, I call Mark Cuban Tulip boy. I once calculated his annual return from the point of the sale of his tulip to present and his return based on his net worth wasn’t anything impressive so I never understood why he is treated like some angle investor savant.

Wolfstreet tracks the blow ups of the modern tulips.

I wonder if tulip boy sold this tulip at the top

Dave Inc. [DAVE] (Mark Cuban backed fintech personal finance), now at $0.68.

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Goodness! Mr. Eifert did not even get around to mentioning ESG as another Red Flag for the potential investor! So many scams, so little time.

As has been said many times, eventually investors will start to worry about Return Of Capital instead of Return On Capital. That day may be closer than we think.

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This is the cover of the current issue of The Economist (except in the UK).


The Economist announced the article on Twitter with:

When you’ve lost The Economist, the days of this racket among the establishment may be numbered. Of course, the article, “ESG should be boiled down to one simple measure: emissions” (which is behind a paywall), while pointing out the numerous scams and deception associated with “ESG” (Environmental, Social, and Governance) investing, urges corporate leaders to concentrate on emissions to “…deal with the grave threat posed by climate change”.

Here is a comment on an earlier post about Autodesk’s having adopted an 83 page ESG “Autodesk FY22 Impact Report” [PDF].

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The E is only the fast acting part of ESG.

The S (die) and G (stakeholder capitalism/fascism) parts are more insidious. The ramifications of companies pursuing these goals in place of merit and financial improvement may not show up for years. If the founders or previous generations of employees have built a unbelievable business, it can take a long time to destroy it.

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There is a lot of room for improvement in the Governance part. My favorite quick fixes:

  1. Restore the old rule that a company cannot buy its own stock. It is obvious that the temptation for self-dealing by unscrupulous “executives” (really, only employees with stock options) is too much for human beings.

  2. Impose a new rule that Board Members have to have a significant part (20%, say) of their total personal Net Worth invested in the stock of the company, in a trust that cannot be sold until 3 years after they have resigned from the Board. Make Board Members act like owners instead of like a rubber stamp for those unscrupulous “executives”.

Chances of our bought-and-paid-for politicians implementing such rules? Zero! And that really is fascism.

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Free Markets v. Hive-Mind Corporatism

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Very true – most boards are in it for the salary and stock options – they have no incentive to safeguard the long term prospect of the corporation – and their decisions reflect this hyper-short sightedness. Often executive leadership is in similar situation.

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Does anyone understand why they’re so focused on (impossible to measure, easy to game) emissions and not (centralized, easy to measure, objective) extraction of resources?

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Because focusing on emissions is a great way to control mass populations through restricting how much those populations are permitted to emit? Look if I find that you emit 20 bad things a month, and I want to restrict you to 15 bad things a month, I cook up a scheme whereby you are “allotted” a token with the exact amount you are permitted and once that is used up you are screwed until your next allotment. This is why they are hell-bent on getting us into electric cars and living in the cities. This isn’t about actually solving problems and curtailing destructive pollution. This is about controlling YOU. They don’t give a damn about pollution, the environment, or clear air/water. They care about controlling you and, eventually, liquidating you once your usefulness to them is over.

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Or, as Doug Casey said, and I frequently quote,

The day is coming when your local government may stop seeing you as a milk cow and start seeing you as a beef cow, and you want to have options before that day.

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John I think it is more likely that they view us as barn rats to be exterminated.

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