Welcome to 2001...again!

I was on the phone this weekend with a colleague I knew from my old DLJ days.  We found ourselves commiserating: “haven’t we seen this all before?”

And we have.

Right about now in 2000-2001 we were seeing colleagues resigning in droves to join dot-coms to become the new dot-com billionaires.  We were seeing old ideas (selling toys, pet food, stamps, computers, etc.) simply going on-line at huge valuations.

Then the market corrected, and it was over.  In a blink…Gone.

What’s different?  Not much:

·      New corporate animals exist: unicorns.  Then it was sock puppets selling pet food.

·      Same business models, new name.  Now: The “Uber” shared model.  Then it was called “lead gen”

·      Pundits telling us that this time it’s different.

·      Is there truly anything new in FinTech today?  Didn’t we see the majority of these in 2001?

·      Inexperienced CEOs with little to no domain expertise. 

·      Illiquid companies with massive private valuations. 

What further validates my skepticism?  Existing strategic investors, who are not buying.  They are partnering and eating at the trough.  But they aren’t acquiring at VC premiums. 

Why bother when they can buy at a deep discount a-la NorthWestern and LearnVest?  Strategic investors are now simply waiting for the inevitable.

If you are a unicorn, you should be raising a LOT of money now.  Take a page out of Peter Thiel’s book from PayPal prior to the dot-com crash.  Forgot what he had to do?  Read it here.

If you are not a unicorn, you should be thinking about selling now (especially in FinTech).  Do your investors a favor and get out now.  If they don’t want to sell, get your resume out ASAP.  They are signing your death warrant.

I regret all of this is happening before the SuperBowl.  It would have been good to see the unicorn ads this year. 

But my gut tells me the unicorns are smarter this go around.

Otherwise, I have some old sock puppets they can use.  Remember these Pets.com ads?

The Turing Test for Financial Advisors

The classic Artificial Intelligence test was whether or not a human could discern if a concealed computer was human or not based on their responses to questions.

This was recently accomplished (click here).

For advisors, this test could also be constructed relative to a robo-advisor based on one simple question:

“Should the user/client invest or not?

What would the robo-“advisor” answer?

Invest.”

The robo-advisor wouldn’t preclude you from investing.  It would not debate you.

In fact, the robo would ask you a series of questions beforehand to assess the extent of your investing experience (akin to a Vegas casino’s warnings about gambling).

“But what would a true HUMAN advisor do?”

They might tell you to not invest.

This presents an interesting dilemma. 

“Is the robo-advisor truly a fiduciary?”

Or, is it an enabler?  A very efficient enabler.

This is important to consider in light of the fight in Washington regarding the definition of a fiduciary (click here).

If we were to truly look at the robo-advisor community we might want to shift the paradigm.

“Are they robo-advisors, or robo-TAMPS?”

A critical eye might conclude the latter.

Well, that was quick..

Derek Sivers is an interesting blogger and author.  His success was due to a music company that was obliterated by Apple.  One press conference.  One Steve Jobs.  Done.

For Derek he watched a lot of work disappear in an instant (still made a few bucks though!)

That stands out to investors.  Could you be wiped out in one press release?  Microsoft used to do this constantly with their vapor ware.  Maybe that's the measure we need to keep in mind: how quickly could one press release kill a business.

As we look at VC that's the power of disruption.  A new idea, developed in a garage, that no one expected (click here for some of them).

Looking back at the FinTech landscape, one has to ask, what is truly unique?  What is there that hasn't been in the back of the mind of every banker?  Maybe finance companies need a Google-like model wherein a certain portion of their time is dedicated to innovation.  Because if we really got down to it, its the industry's fear of change thats hindering it.

But the disruption today is not disruption.  Its a simple matter of letting some other folks whose opportunity cost (or incentives) are aligned to pursue an obvious theme.  

Take peer-to-peer (P2P) debt.  The banks should have done this long ago.  So what happened?  Some smart guys do it on-line.

Now, fast forward.  We have one IPO: Lending Club.  And a traffic jam of wannabes right behind them.

What do we also have?  Markets being markets, a slew of P2P fund managers who had first mover  advantage.  Since no institution would initially touch the debt, these P2P managers did...and benefited from it.

Now the fund marketplace has a retinue of P2P debt managers charging a range of fees.  1% flat fee, or 2/20, etc.  But, are they really adding alpha?  Or, did they just happen to be first in line, on a non-exclusive basis?

What was interesting was this press release from Bloomberg (click here to read it).

Why?

Citi is stepping right in front of the line of the smaller P2P debt managers with one swoop.

Like that, a market "advantage" is gone.

There is a scramble now by the P2P debt managers to line up behind Citi in the queue.

In addition, they have a 25bps rate increase coming in their portfolio.

With the inability to replace their existing debt with new quality debt, and limited data on defaults in a rising rate environment...what would you prefer?  A note backed by Citi...or a small P2P manager with less than $100 million AUM?

As far as the originators are concerned they are fine.  Their mission is to clear inventory as quickly as possible and not hold the debt themselves.

In the end, the P2P space is not that unique, but it is incredibly efficient.  To Citi's credit, they can be a client/partner without having to "buy the cow".

Conversely, I have always felt that the asset class is not new.  It seems investors will conclude that as well and pay accordingly.

The entrepreneur?  As long as he keeps his valuation near what the corporate opportunity cost is/was, they stand a good chance of an exit.  

Those stretching for an IPO need to be worried...they are only one press release away from oblivion.

I've got 25 reasons...

James Altucher had a great post this week that I enjoyed quite a bit: "10 Reasons You Should Never Own Stocks Again". This was one I found myself truly laughing out loud.

Why?

The inherent contradiction that has always been there with the stock market.  In the USA we have made it so easy for the pedestrian investor to get into so much trouble.  

Why?

Every market needs a bid and an offer.  

We are now in a low return environment.  No bond yield and flat equity returns.  So what do we need?  A bid.  Smart money is running for the mattresses.  What do we do?  Give "un-smart" money a loaded gun (remember Joe Kennedy's shoe shine boy?)

How?

Let the retail investor buy pre-IPO companies.  That's right.  We had regulatory and legal issues when companies IPO'd and giving access to retail.  Even with a public/liquid ticker the layman has issues.  So, what do we do?  Let them buy pre-IPO companies.  Why not?  Let them double down on something else they know little about.

If we look at the advent of some of the VC plays at hand, many of them are predicated on providing the consumer with the tools/methods for their own destruction.  Without any fiduciary or curation.  

Who else does this?  Las Vegas.

We gave all the keys to Citibank a while back and reversed that course.  That shouldn't mean we go 180 degrees in the opposite direction.

I have 25 reasons why I am worried.  And one person knows it better than anyone: Janet Yellen.

This Fall we will have our first interest rate increase.

Dont fool yourselves.  We haven't quantified what this will do to the economy.  Ours and the rest of the world.

James gave you 10 reasons to stay away from stocks.  I think my 25 may be even more concern.

In the interim: GO BID!

The Seduction of Hope

When I was back in California the drought was front and center.  You couldn't avoid it.  The hills of Santa Ynez weren't just brown...they were burnt.

Yet, everyone spoke of the hope with the next El Nino storm system.  It seems there is no doubt we will have rain.  But will it solve the drought?  No.  But, the hope is there.

Likewise, there is an excellent article in the New Yorker (The Really Big One) about the likelihood of an enormous earthquake in the Pacific NorthWest.  One that would make the "Big One" in SoCal seem like a cake walk.  What was fascinating was the inevitability of this earthquake occurring, and how completely unprepared the cities are.  The hope is that it will never come.

Markets hoped for a bailout of Greece, yet smart money sees the bailout for what it really is: kicking the can.

Accordingly, smart money is still in mattress mode.  Look at how many big investors are in cash now.

I found myself incorporating more and more of what Singer wrote about in The Surrender Experiment.  I am no longer fighting this trade.  Let it just happen.

Personally, I am trading my book across all facets of our life.

I don't think the USA is safe for my kids, so I moved.

I don't think the USA's educational system is world class anymore, so I moved.

I don't think the real estate market in drought-stricken California will make it, so I moved.

I don't think the financial industry will be the same, so I innovated.

I don't think what got me to "here" will get me "there", so I pivoted and re-dedicated myself

Own Bonds?  Forget it.  Buy stocks?  Waiting.

Did I miss anything?

Maybe.  Feel free to reach out to me in case I did by clicking here.

This weekend, I am looking forward to my next read: Steal Like An Artist.  Should be a quick one.

Music-wise, this cover of "Mad World" by Jasmine Thompson is spot on, click here to listen to it on Apple.  I am enjoying this new service more and more.  My daughter and I have found ourselves sharing quite a bit through it.

So, while I hope nothing bad happens, I take comfort that in my conservatism, I have a good book and some music to enjoy this weekend.  I hope you do too!