Boys will be boys… And let’s face it, the finance sector has pretty much always been a boy’s club.
Along with that, of course, comes all the usual hypermasculine tropes.
Conformity, one-upmanship, increasing aggression, loss of morality, tunnel vision… not exactly positive characteristics.
It’s the same kind of vapid, stubborn emotional compulsion toward a singular outcome that causes poker players to go on tilt, investors to chase losing trades lower…
Or Christian Bale’s character in American Psycho to get all murder-y over a colleague’s business card.
But the most damaging net result of this combination of behaviors is groupthink.
Far from “the wisdom of crowds,” which requires diversity and independence, groupthink is the outward expression of conformity and confirmation bias.
The GameStop short squeeze from a few weeks ago is a solid recent example.
A bunch of overprivileged, underdelivering, complacent hedge fund laxbros all held the same dumb long and short positions, and all patted themselves on the back for their collective cleverness, crowding billions into the exact same trades.
Groupthink also led to Tulip Mania in 1600’s Holland, the South Sea Bubble in 1700’s England, Railway Mania in 1800’s Britain, and the comparatively recent Crash of 1929 and Dotcom Bubble here in the US.
Crowded trades and speculative bubbles like these are hallmarks of economies teetering on the edge of a breakdown. That’s especially obvious to most investors now, as even CNBC noted last month a majority recognizes there’s a bubble in just about everything.
With all that juice largely wrung from the proverbial turnip, what are all the conformist, competitive, tunnel visioned, amoral, aggressive risk-taking hedge fund laxbros going to do for fun and profit in this environment?
Why, make something up, of course!
Enter… the SPAC.
My Venture Society colleague Marin Katusa published a fantastic writeup on Special Purpose Acquisition Companies — or SPACs — back in September. You can read it here.
In it, Marin said the following:
“SPACs start as a shell company and sell shares to investors. It doesn’t have any operations or business of its own. The purpose is to acquire one that does.
It’s like a backdoor route for large sums of money (think $100 million, or more) to get into the stock market.
Investors and the private equity funds behind these SPACs love it because there is much less underwriting.
And the paper pushing process through the SEC is easier.”
Put differently, SPACs have become an angle for ultra-wealthy financiers to raise nearly limitless amounts of capital without necessarily being required to disclose what it is they’re going to buy with it.
That’s troublesome in and of itself.
But what has me more concerned is the pace at which they’re raising capital, which has increased from roughly a billion dollars in all of 2019, to a billion dollars per day this past month.
Source: Dealogic, New York Times
The fund-bro dogpile into the shell company space has produced the usual anonymous, immature, off-color comments like, “I know more people who have a SPAC than have COVID.”
But in a clear effort for finance to finally jump the shark once and for all, it has also encouraged lots of comparatively inexperienced non-fund bros to wade into the space — most recently former MLB superstar/JLo attaché Alex Rodriguez and former NFL quarterback/social activist Colin Kaepernick.
I don’t know about you guys, but I’ll take a knee on that one.
In general, if I’m going to look at investing in this space, I want to see three things – an experienced financier, a company clearly attached, and a clear path for that company to grow over the next few years.
If you’ve been reading along with us for a while, you’ll be familiar with at least one such instance — Fortress Value Acquisition Corp, which ultimately merged with MP Materials Corp. (NYSE: MP) and handed us roughly a 100% profit.
The thesis there checked all the boxes. FVAC was formed by Fortress Investment Group last April.
They then completed a merger agreement with US rare earth mineral producer MP Materials last July — the prospects for which I laid out in an article back in November.
Oh yeah, and posting shirtless pictures of himself.
But the real reason I’m bringing this up here is to remind folks that everything is not always as it seems.
Although Chamath may come across as empathetic — particularly during the GameStop squeeze interview — he almost certainly has ulterior motives as well.
After all, he’s been increasingly visible over the past year.
And perhaps not so coincidentally, he has been simultaneously promoting his investments on social media to a rapidly increasing audience.
While he’s certainly had several successes — Virgin Galactic and MP Materials, to name a couple — investigative research on his health care investment Clover has unearthed some concerns about misleading investors.
But more importantly, given that Clover is small, ineffective, operates only in New Jersey, and might be violating customers’ civil rights, the company may very well be misleading customers.
So buyer beware… Bubbles require deep due diligence before making any significant investments.
All the best,