“Being good…is not good enough! Everyone must be connected to our strategy, or we will find you, and weed you out! Information arbitrage is our business. If you don’t know what an information curve is, then find out! Position yourself in an information curve. Dominate the curve! Nick Leeson, who most of you know and all of you have heard of, runs our operation in Singapore, which l want all of you to try to emulate.” — Ron Baker, in Rogue Trader (1999) “It is this semi-sucker rather than the 100 percent article who is the real all-the-year-round support of the commission houses. He lasts about three and a half years on an average, as compared with a single season of from three to thirty weeks, which is the usual Wall Street life of a first offender. He knows all the don’ts that ever fell from the oracular lips of the old stagers-excepting the principal one, which is: Don’t be a sucker!” _ Jesse Livermore</em>
In 2005-2006, briefly, inexplicably, I had an information edge over most of Wall Street. I was reading the top financial blogs of the era, Calculated Risk and The Housing Bubble, marveling at flippers, NINJA borrowers (no income, no job or assets), negative-amortization. I asked friends in Wall Street mortgage departments how come, after Greenspan started raising rates, they weren’t shrinking profits and laying people off, what with a flat yield curve, shrinking net interest margin and all that. They said they were pushing ARMs, originating to sell, making it up on fees. I asked if they weren’t worried about defaults, was told the deals were overcollateralized to resist high defaults, and anyway it was the bondholders’ problem. I downloaded some applications for option ARMs and thought, ‘these guys are out of their cotton-picking minds.’ This was at a time when certain banks’ net profits consisted entirely of negative amortization, interest that was being tacked onto loan balances without any cash changing hands.
That was my formative experience in the power of crowd-sourced research. This is not a Monday morning quarterback, 20/20 hindsight claim. Those blogs saved my ass. And, in truth, a long list of people called the crisis1. The thing they had in common was, they thought for themselves, they did their homework, they were willing to bet against the crowd.
ANYTHING on talking head TV or put out by a bank, is a) selling something and b) conventional wisdom. There is just no money in anything else. At its best, it’s listening to awesome guys like Icahn or Druckenmiller, but who are primarily talking their book.2
OK, I didn’t really have an information edge. That was pretty much BS.
In the old days, you could say that the floor traders at the exchange had an information edge from being at the nexus of the flow, the upstairs trader had the customer flow.
I have the speculator’s edge, which is that I don’t have to do a thing. The market-maker has to provide a bid-ask, the institutional investor has to put his the clients’ money to work using the strategy he pitched. I just wait until the market does something that looks stupid and I try to apply calculated aggression, invest in meaningful size in an attractive risk-reward opportunity. Most of the time, I just try not to do something stupid. It’s not information arbitrage, it’s stupidity arbitrage.
If you’re like
most people almost everybody, there is no information arbitrage, just old-fashioned hard work. I’m sure there were a bunch of suckers who thought they were geniuses being in Mike Milken’s orbit, or Bernie Madoff’s, or even just as Steve Jobs fans. Most of the time, there is exactly one guy in that information curve who is getting rich, and it’s not you. You’re their bitch, their greater fool, their sucker, their mark.
Even the floor traders and the upstairs traders don’t have the edge any more. They got information-arbitraged out of the loop by direct-access trading and HFT bots.
The real edge is, doing your homework, listening to a diversity of opinion, thinking out of the box. And not doing something dumb just because everyone else is doing it. And that’s all I had, a divergent opinion with an attractive risk-reward, and a healthy level of fear over what I was reading.
So, where does StreetEYE fit into this story? In the mid-2000s, I was fortunate to fall in love with blogs and find smart people with divergent opinions doing their homework. But it was a hard road for the early adopter, building a blogroll of dozens of blogs in FeedDemon, Google Reader. And (somewhat tragically) ultimately blogs never really achieved their full potential because there were too many, it was too hard for a lot of people to navigate, there was no central front page where great stuff filtered up, it was all ad-hoc blogrolls and hat-tips.
Then Twitter came along and it was a similar process… find some awesome people to follow, like these. Then say, hmmh… who do these guys follow, and find some more. Then say… I could probably write a script to do that.
And then at the next level it’s …. what are the stories everyone is talking about right now? I don’t want to come into the office and have everyone say, “did you see Soros’s Op-Ed in the FT?” I want to see everything as soon as it gets popular. Great news aggregation sites like Memeorandum and Hacker News and Reddit and Buzzfeed and Digg have cracked the code and become the ‘front page of the Internet,’ finding the most popular stuff in their respective fields. At some point I looked at what my filters were popping up and I said, to some extent I’ve cracked the code, somebody’s got to do the same thing for financial markets, and I might as well put this out and give it a shot.
But at the ultimate level, it’s about you, dear reader, and it’s about us. My hunch is, if we get a smart bunch of investors to come to the site every day, read, share, and especially upvote the stuff everyone needs to know, together, using the wisdom of crowds, the power of technology, and a light touch from a humble editor/curator, we can find the best journalism, blogging, research, and analysis, and make the best goddamn front page for investors on the Internet.
And that, for now, is the StreetEYE manifesto. Together, we can find the best content on the Internet, be better informed, elevate the quality of the conversation, and if we don’t all get rich, maybe we can at least avoid the next Really Stupid Thing.
I welcome any and all suggestions, issues, complaints. Please email me at email@example.com. The most important thing I need now is feedback on how to make it better.
And keep reading, doing the hard work of staying informed, and upvoting/retweeting to pass it along to your fellow investors.
Your humble fellow investor and curator _
1Even excluding talking heads like Roubini, Zelman, … Paulson, Ackman, Einhorn, Falcone, Eisman… I could go on for a while. (As an aside, for anyone jumping on the anti-Ackman bandwagon and mocking his HLF and JCP plays… go back and look at what he said about MBIA before the crisis.)
2It’s not just that there’s no skepticism and thinking outside the box. My pet peeve is the way every other word is invested with heavy emotional weight, fraught with meaning, an incantation to soothe the faithful. It’s all so tribal and inflammatory, when the essence of good investing is to be independent, dispassionate and unemotional. And then, anyone who shows up and says the emperor has no clothes is mocked mercilessly. Anybody willing to stake their reputation and go against the crowd is worth a respectful listen… and even better to find the ones too crazy to even be mentioned.