Top of the pile
This piece on how tough it is to launch a new fund was making the rounds on Twitter. Asset management is a brutal business because a lot of it has become commoditized. The other challenge is that you need scale to survive. Unless you deliberately choose to remain small, it becomes all about gathering assets. Asset managers today do more to gather assets than deliver performance. This isn’t just my biased critique, this is what the insiders in the industry say😉
And assuming that an asset manager goes for scale, then all sorts of perverse incentives seep in. Today, a lot of asset managers will bend over backward to appease large investors. For example, if there’s a large investor who wants predictable returns, AMCs in funds will happily hug the index so that they don’t deliver any surprises returns-wise. And then there are shady things like paying large allocators, costly vacations, doing very very unsavory favors, and so on. These are all open secrets that everybody knows but prefer not to talk about it.
But here’s the part that caught my eye:
Your ability to build a network, tell a story, and get an introduction are part of your edge. Without it, your voice will be part of the noise that the allocator tries to tune out in order to get anything done.
Storytelling cuts both ways. Yes, it is important to tell a good story to sell. But for a lot of asset managers, storytelling has become everything. And the thing about stories is that they are an extremely powerful way to dull critical thinking in investors. Stories can disarm and ensnare even the most critical investors. And there are several asset management firms globally that survive solely based on stories without delivering a lick of performance. They produce bullshit on an industrial scale and it works.
Is more better?
Whenever we think about solving a problem, most often than not, our default is to add something to fix that problem. Think about it, very rarely do we think about removing something. Take the example of investing, how do investors end with 20-30 funds? In my view, it’s the same thing at play. We think that the best way to generate higher returns is to add more funds, stocks, or products.
Of course, this is not to say that you can always solve problems by removing things. But, the point is about how this default setting of ours to add more can cause issues. Here’s a fascinating study on this behaviour:
One of the experiments involved giving the participants a pattern of colored and white squares and asking them to change the colors in order to make the pattern symmetric. In every case, symmetry was far, far easier to achieve by taking away a few colored squares, but only half the participants recognized this solution. When given a few opportunities to practice, however, the rate of subtractive solutions went up to 63 percent.
This seems to indicate that people don’t always make subtractive solutions their default but will eventually work it out. To probe this question further, the researchers did the same experiment but gave the participants additional tasks to distract them. This added cognitive load seemed to decrease the likelihood that participants would come up with subtractive solutions, suggesting that it takes some mental energy for people to overcome a natural tendency to ignore subtractive options.
This whole behavioral investing, investing psychology nonsense is something of an interest of mine, and I was listening to this podcast today. And I learned that the self-help industry is apparently worth over $10 billion. I mean, I knew it had to be huge but I didn’t know it was this huge. I was doing some Googling and came across a few interesting pieces on this “self-help”, “self-improvement” bullshit.
On the origins of this industry:
Today, the self-help industry has a peg in almost every medium available. While books were the main facet of self-help throughout most of history, today’s self-help blogs and TV shows have taken the practice digital. Workshops, seminars, and retreats led by self-help gurus and life coaches can cost self-help junkies up to $3,000 per event, while productivity apps and podcasts have taken self-help on the go. It’s easy to think of self-help as a simple product with a good marketing team behind it, but self-help is so much more than a product. Today, the self-help industry is an ideology that has more in common with modern religion than the modern car.
I’ve always been a skeptic about self-help books. After over a century of books and experts on the topics of“personal development and improvement,” one would think the human species would be made of super humans and enlightened Buddhas. Given the current state of affairs, this doesn’t seem to be true just yet.
And the more you dig, the more dirt you’ll find. Here’s a disturbing expose of Tony Robbins, arguably the most popular face of this whole self-help bullshit
I also came across this piece on erotic massage parlors. Apparently, this industry could be as large as $4.5 billion in the US:
According to a 2018 study by the nonprofit Polaris Project, the illicit massage industry in America was estimated to generate about $2.5 billion in revenue a year. Kimberly Mehlman-Orozco, a human trafficking expert and author of the book Hidden in Plain Sight, puts that number considerably higher now—as much as $4.5 billion in annual revenue (including what customers spend for a massage and sexual services), or about one-quarter of the overall $16 billion massage services industry.
Once you read the piece, it becomes obvious, but the numbers at least to me were surprising. This goes to show these shadow economies, for the lack of a better term, can be quite large.
Everything is fintech
So much fintech everywhere. Last week alone, we had two new fintech unicorns in Groww and Cred. Whatever you may think the tag is worth, whatever you think of fintech, it is scorching hot right now. Take it with 2 buckets and 2 more buckets of salt but just some broad numbers from a BCG report for whatever it’s worth.
But Dify in its current state is very much the tip of the iceberg when it comes to Opera’s fintech ambitions.
“It’s not just about the wallet, it’s about what else we can do that would sit in and around that wallet,” said Andrews.
To hear Andrews tell it, there are very few fintech services that Opera is not considering tacking onto Dify. He highlighted Buy Now Pay Later tools and fractionalised share investing as two potential expansion areas (while stressing that cashback is the short-term focus). Both areas have exhibited explosive growth throughout the Covid-19 crisis.
Like I said, on a long enough timescale everybody becomes a fintech and every fintech becomes a lender.
Jamie Dimon wrote a lengthy letter and he had a bunch of things to say about Fintech.
Banks already compete against a large and powerful shadow banking system. And they are facing extensive competition from Silicon Valley, both in the form of fintechs and Big Tech companies (Amazon, Apple, Facebook, Google and now Walmart), that is here to stay. As the importance of cloud, AI and digital platforms grows, this competi-tion will become even more formidable. As a result, banks are playing an increasingly smaller role in the financial system.
Here’s an interesting bit:
It’s stunning how private markets and money market funds have filled in the void left by the banks when it comes to lending. As for Big Tech entering fintech, financial services are among the most regulated sectors on the planet. The question is if they really want the intense regulatory scrutiny if they go any deeper than payments. This apart from having to deal with the growing regulatory spotlight over their dominance.
The BIS had published a paper on the topic of tech giants in finance and regulatory approaches.
We’re all going to die
This piece on climate change research was interesting for a bunch of reasons. It shows the perverse incentives at play when it comes to publishing research. It doesn’t matter if the underlying data or assumptions are flawed, the incentive is to publish more and more at any cost.
The lesson from this experience is that science has momentum, and that momentum can be hard to change, even when obvious and significant flaws are identified. This is particularly the case when the flaws exist in databases that underlie research across an entire discipline.
The challenges for climate research are significant. Consider that in contrast to the 900 articles that misused a skin cancer line as a breast cancer line, our literature review found almost 17,000 peer-reviewed articles that use the now-outdated highest emissions scenario. That particular scenario is also by far the most commonly cited in recent climate assessments of the IPCC and the U.S. National Climate Assessment. And every day new studies are published using outdated scenarios.
Inertia is a powerful force. It’s easier to keep doing the same goddamn thing over and over again than to change everything and question all your assumptions. It’s the same in investing, life, and scientific research. It doesn’t matter how big the IQ is or the number of PhD’s. We’re all bloody stupid in our own ways. This is probably why we’re all going to die soon, be it from this virus or from climate change.
A scary piece on climate change action:
The centrality of hand-wringing about GDP and economic growth almost always serve as a counter to climate efforts, as Australia demonstrates nicely; that needs to change. Treating PR-heavy greenwashing fossil fuel companies as if they’ve had some revelation about climate action is a destructive act – they are simply re-framing their decades-long effort to pollute as much as possible before they’re held down with sufficient force. The ‘net zero’ plans of countries and companies need to be more than scrutinised – they need to be blowtorched at 2,000 degrees. Short term actions need to be the new test of ambition. Most corporate and country climate plans are empty shells, and that too needs to change.
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Technology & Startups
Reader, you are not. NFTs are just as absurd and banal as you probably believe.
I think of this as the Christopher Nolan effect: If you explain an incredibly simple premise — like, for example, “a guy forgets everything every five minutes” or “you can go inside people’s dreams and make false memories” — over and over in increasingly abstruse ways, the person it’s being explained to will eventually tell themselves, “I just don’t get it.” This effect is only strengthened the more people there are agreeing that the matter at hand is “cool,” “interesting,” or “complicated” — a process of mass, self-inflicted intellectual gaslighting.
Everything that can be Amazoned, will eventually be.