Previously I wrote about the evolution of media and how it ends in a poorly defined digital Colosseum. Here I write in detail about how/ why that Colosseum will entail the creation of financial eSports
- Financial markets are unique from politics, science, or other arenas of the media because they are accompanied by Timeseries.
- For the most part these timeseries consist of a price which implies a value (i.e. what you’re paying the price for) and an expectation (what that price implies - relative to historical prices, relevant comparables, consensus values and so forth).
- Unlike science - financial statements affect expectations about a price, and often the price of a security itself. If you state that “the earth is flat” then science can easily discard that statement. If you state, “Tesla should be worth $1 trillion” - this statement might be equally absurd, but it exists in the context of a real price that cannot easily be discarded because someone is willing to “bet money” on that condition. Put another way: financial statements affect the prices of the things they seek to describe and therefore are inherently less scientific than postulates made about the natural world. Soros and others have termed this phenomenon, simply, “reflexivity” - i.e., the innate conditions of markets to reflect not underlying reality, but rather an interpretation of a reality
- This disconnect between fundamentals is further exacerbated by all financial markets being (for the most part) legal abstractions. When you own a “company” you do not simply slice the company into pieces and keep one of those pieces in your closet, like you might with a bar of gold. You’re betting not only on the performance of the company but also the entire political context, and legal framework surrounding that company sending you back dividends and capital returns.
- Thus - in addition to being reflexive, most markets are innately political. This has become truer as governments share of GDP has expanded over the years.
- Legal frameworks frequently shift. Discussions and perceptions frequently shift. Shifting legal frameworks and perceptions can shift without any underlying change in the business’s immediate operations. But because a business can issue equity or debt with higher valuations, and subsequently fund new business operations - “narrative” or “regulatory” shifts are relevant fundamental information. The reason why markets seem to predict the future is precisely because markets fund the future companies plan to create. It is not some triumph of “the invisible hand” or “market efficiency” but rather very deliberate actions taken after raising money. If you say Tesla is worth $1t you give Elon Musk a war chest to go implement his plan, and give marching orders to huge numbers of people to go along with him.
- Thus - most “meaningful financial statements” inherent consist of a] a discussion of price and how it is arrived at b] a discussion of what value ‘ought to be’ given prevailing market conditions c] a discussion for why price has diverged from value d] weighing implications of changing laws, regulations, and investor preferences insofar as they can affect c.
- Enter the problem of timeframes. It is frequently the case that the length between value and price converging is in the years. This creates a logical flaw. While certain business fundamentals of very capital-intensive, time-tested businesses (i.e. those preferred by Warren Buffett) can be reasonably discussed over years - most businesses and assets have too much fluctuation to make meaningful statements over a multi-year timeframe. This is precisely because of 7 c & d, or the implications of “reflexivity” taking effect. Narrative shifts and regulatory changes dominate more volatile, new ventures.
- In the internet era, timeframes of years are especially inappropriate - because people have an attention span of days – or weeks at most. So not only does “speaking in fundamentals” have the problem of reflexivity, but also the problem of “relevance”. People pretend to have 5-year horizons but will quickly abandon or ridicule people who have made wrong statements over a 3-month window. Whether this is wrong or right does not particularly matter - so much as it is true and predictable, and therefore a reasonable critique of financial speech. Meaningful speech ought to match the timeframe of its audience, whether that audience fully grasps (or is honest with itself about) its timeframe or not.
- Global tax codes and market structure (high transaction costs) providing incentives for holding for the long term and common-sense favor long term investors, but the financial media inherently stifles them. This is innate to a} narratives and regulatory shifts undeniably driving price action, and thus fundamentals of heavily traded stocks b} financial participants having small attention spans - both features unlikely to change. We are then left with a seeming paradox. Relevant speech diverges from profitability expectation.
- Indeed - empirical brokerage statistics show that the average audience member for financial content loses large amounts of money at worst, or at best vastly underperforms the index. Cross-sectional wide-ranging studies in multiple countries (most notably Taiwan which quantifies the financial impact of its day trading culture) show this consistently to be the case. This holds across asset classes - and is especially true in zero sum contracts such as CFDs, or forex trading. Even without studies, the vast profitability of market making enterprises focused on retail trading provide ample evidence that aggregate focus on short term financial fluctuations generates a financial loss for its participants
- We are left with two seeming incongruities and an obvious, and somewhat inescapable conclusion. 1] financially rational discussion would focus on very boring businesses that had limited to no effect from reflexivity or regulatory / political shifts. This would foster long term compounding gains. 2] consumption of financial media diverges vastly from said financially rational discussion. leading us to the conclusion that
- The primary motivation of most people consuming financial speech is not profit, but rather entertainment. This is not to say that going to the Berkshire Shareholder conference is a waste of time, or that ’long term value’ cannot be discussed - rather that it is like some irrelevant third party in a 2-party system driven by a mix of catalysts, and narrative shifts. The 2 major parties get all the clicks, and that is that.
- The impact of this is much, much higher than it would be otherwise due to the relevance of fiscal and monetary policy to financial markets. Fiscal and monetary policy is driven by human beings who conduct press releases in short term bursts which drive large moves in financial markets, often with accompanying political ramifications. This both decreases the timeframe of important market moves (i.e centers it around decisions and legislation) as well as increases the reflexive attributes of the market because politicians are human beings communicating on the very same channels as the people consuming financial content about those people.
- This now leaves us with a useful set of initial conditions. A] Reflexivity and narrative matter when framed in a context of value and price diverging. B] The timeframe that people can pay attention to these things is relatively short due to the constraints of the platforms / media environments we exist in - and is getting shorter and more reflexive due to societal conditions that are unlikely to change. C] People consuming financial content are doing so because they are bored or want to gamble. D] Despite this irrationality, because the people consuming content actually trade they affect the fundamentals of companies (with Tesla being the most extreme example, and Bitcoin being the second largest)
- This set of initial conditions can neatly account for much of the past 2 years of trading as well as discourse around trading. We are however, at a new unique juncture because the public has broadly realized that the “5 year outlook” clickbait predictions (from the common tweet format - what business would you buy and hold for the next 10 years) - largely have crashed, catastrophically. Many of the holdings of ARKK investments, various SPACs, and crypto currencies not only proved the irrelevance of “long term planning” but also destroyed huge amounts of equity capital from retail investors. Which leads to a new, emergent condition
- Now that the general public has widely recognized the futility of making long term predictions, they no longer approach the Puru Saxenas, the Cathie Woods, Chamaths, Michael Saylors or the Deep Value Investors (Burry for example) with the same reverence.
- Even if you are trading financial markets because you are bored losing 70% of your bankroll is not fun and causes a lack of engagement (which has manifested in the decline of Robinhood and Coinbase share price)
- The current market is characterized by huge financial losses, and a lack of trust in the trading platforms (Robinhood/ various crypto players) and the people paying for data from the trading Platforms (i.e Citadel). The market also broadly does not like Blackrock which seems intent on capitalizing on various memes in a disingenuous way (pivoting back and forth between clean energy and oil investment). After having followed markets for some time, trust in pundits such as Jim Cramer is also very low.
- Platforms like Coindesk (+ endless crypto grift platforms), Twitter, Substack, CNBC, Bloomberg are ad revenue supported and the platforms described above (the ones who lost peoples’ money and trust) are the ones paying for ads. This both manifests directly on “feeds” of people interested in financial content as well as explicitly via paid promotion through “financial influencers”.
- Because creating financial content is relatively difficult - this results in a series of incentive problems. Ad sponsored financial influencers have a hard time retaining the trust of their audience, because for the most part - people paying to advertise financial products are innately not trustworthy actors. If you need to advertise your asset, chances are your asset isn’t good. Subscription supported financial influencers cannot afford to publish their best work for free - which in turn lowers their reach / audience. Finally - because financial markets are “timeseries” based - for the most part – the point at which you are opining on markets is the point at which you’ve failed to generate trading profits. Institutions tend to have strict requirements about speaking at length about investment theses on social media. So there is an additional level of adverse selection based into the commentary of financial markets. If you were able to make $ trading you couldn’t even talk about your trades.
- Thus - we live in an era where peoples’ engagement with financial markets has never been higher, but the structural information distribution systems are fundamentally broken due to a mix of timescale and incentive problems.
- Those who can make money trading either don’t have the time to do so, or are not allowed to do so by compliance. Those who cannot make money trading lack useful insight at best and are aligned with “retail monetization” (i.e. scams) at worst.
- This results in my E-Sports Postulate. The postulate states that financial markets have been gamified. There are many players who now roughly understand the rules of the game. Talented professionals have yet to meaningfully compete in a public setting that would be sufficiently intelligible or engaging for large numbers of people. A digital colosseum will emerge soon.
- Consider professional poker. Originally there was vast ‘retail’ involvement on online poker via “full tilt”, resulting in large losses. But because players learned the game’s rules they appreciated the professional version of the sport which migrated to ESPN.
- Something similar happened with video games - where large numbers of people learned arcane rules of League of Legends by actually playing and suddenly were packing stadiums to watch people compete.
- I believe that something like this will occur in financial markets- simply because in spite of losing vast amounts of money people broadly can engage with markets and content around markets in a fundamentally different and deeper way than they would have been able to pre-covid.
- Namely, there will be “players” who iterate and trade publicly. They will have to have relatively short time horizons in order to stay engaging and will need to focus on innately engaging market topics (namely, narrative shifts and catalysts that drive large, immediate gaps in price)
- Short time horizon is important not just because the nature of the engaging content (which takes place in tight windows). But also because the accrual of statistical significance. It is possible to build trust around short time-horizon content because a large number of data points can accrue if you make frequent claims. Whereas being right on a long-running trend can be fun for a while, but once the trend stops - engagement cliffs alongside the asset.
- Becoming an eSports “player” is financially rational, potentially - because of a number of benefits that accrue to the player. Namely A] ability to collect data on one’s own statements and subsequently gain a real edge versus other people who do not have that data B] management access. It is common to receive corporate access for being a financial influencer associated with a company - which might cost millions per year to acquire as a buy-side PM/analyst. C] ability to influence Wall Street analysts evaluation of a stock / its multiple. D] the ability - alongside other “players” to fully quantify the effects of reflexivity in a way that could be deployed in scalable quantitative strategies.
- Fundamentally “plays” will consist of three basic actions. A] Previewing a likely market event and constructing a position / risk exposure that capitalizes on a perceived asymmetry. B] livestreaming /responding to said market event C] recapping event.
- Events will typically be a] fundamental – i.e earnings, central bank decisions, or data releases or b] political / narrative driven – i.e the passing of a major bill, invasion of a country etc c] unhinged – i.e purely digitally native, ala trading a bubble. But would still likely focus on an event or a perceived acceleration in a major narrative such as a conference (Consensys/ Bitcoin Miami) or an event (the merge)
- This is rather different from standard content in the status quo which tends to resemble traditional sell-side analysis (this is the value of a company and these are the things that could cause it to move there).
- 100 page PDFs and accompanying Excel Models are a bad UX that will never gain widescale traction in the attention economy. But they are the status quo for the financial industry. A better UX would incorporate: 1] relevant information around all assets being discussed 2] interactive charts previewing events and easy to read tables 3] sortable opportunity tables that inform workflows 4] streams around events 5] podcasts 6] tik tok videos with rich infographics.
- The UX design will likely become native to “events” – and thus will need to incorporate streaming, because events transpire in real time. This is a hard problem and will require building software
- More interactive UX will allow increased data collection which will increase the utility of being a “player” as opposed to running in anonymity
- Put another way, there will come an engagement * technology threshhold where the compliance benefits of being anonymous and running a hedge fund will be less than being a public financial esports participant. This threshold will not occur for many years, but people who are early to the trend will accrue massive advantages due to network effects latent on social media
- None of this exists.
- Without getting too in the ‘monetization’ weeds it is somewhat easy to imagine a world in which you make a “franchise model” for digitally native traders, providing them the right tools, and allowing them to share data and management access at scale – potentially even on a distributed basis, or one that benefits their streamers
- It is believable embedding financial alignment with these “players” could be done through a cryptocurrency or an exchange token
- Informational advantage also works well in this frame. Consider private 1 on 1s that are common with hedge funds and are heavily monetized by sell side investment banks. There is no reason why this format could not occur on Twitch as premium content with eSports financiers leading the sessions.
- Rivalries in the hedge fund world are humorous and engaging. The popularity of the show Billions shows fairly well that finance culture can translate well into the real world. These rivalries are accompanied with financial timeseries (someone is right and someone is wrong) – and this will make for good content.
- Cathie Wood is arguably the first Esports financier. She is interesting because she has sustained massive investment losses (in the billions) without losing her investor base. This is (I would argue) because she is able to engage directly with her holders and reassert her investment thesis. I believe Cathie’s model is interesting – but undesirable because of the problem of statistical significance (i.e. she has a hold time similar to Warren Buffett, so her theses are innately less engaging)
- Much as Cathie Wood invented her own ‘style’ – a fundamentally new trading/investing style needs to be deployed. Imagine a Venn Diagram. “Consistently Engaging”. And “Makes Money”. Meme stocks and SPACs are engaging but don’t make money. Warren Buffett makes money but him buying OXY once every 3 years isn’t consistently engaging. The correct format needs to both trade frequently focusing on exciting market events, and make money.
- All of the parameters and constraints are clear but there is an enormous psychological friction to “entering the digital colosseum”. Running an investment strategy is extremely difficult without endless online trolling or the addiction native to social media platforms. And the type of “engaging but profitable” trading strategy specifically is especially nightmarish to implement. Added to this is the need to simultaneously execute on the tech side (i.e. building something people want to consume). This is, in my view the biggest potential risk with the model. The type of digitally native portfolio managers who would perform the best in the new financial esports arena will simply burn out or go mad before the future can become a reality
- Reiterating point 38 - these people don’t exist. I sigh as I stretch, readying myself.
- I know who could do the job well though. And once you see it you can’t unsee it. Robinhood is broken. Meme stocks /crypto scams are powerful and interesting but don’t align well with users, regulatory interests, or even fun in the long run (only fun on the way up). But we cannot go back to what was before. In the ashes of the meme/retail boom of 2020-2021, will rise a Phoenix of clicks, financial assets, increasingly indistinct from the totality of speech in modern society. The crowds will delight as they see financial gladiators spilling their own livelihoods, playing the eSport of trading in a digital colosseum.
- And perhaps through continuous combat, something more can emerge.
- “What we do in life echoes in eternity” – Maximus, Gladiator