“…the line between public and private markets continues to blur.”
Stories of Risk
// Perhaps these past few weeks in the markets will be nothing more than just another spike on the volatility chart. It may be, but this point in time will have long lasting ramifications for all markets. I’ve tried to handicap the end game, but I have no idea.
But, I’m fairly confident, when we look back at what has happened and why it has happened, the narrative will revolve around risk. You’ll hear about firms taking too much risk and people who didn’t know the risk and institutions who underestimated the risk.
In examining the motives of all the participants, we also have to question how we got here. Without going into too much detail, with low interest rates and the support from the Fed and the government it’s created an environment where investors only focus on the reward and disregard any of the risk. And because of this, a select few will make a ton of money, while a significant number of funds and retail investors will get crushed.
When people are stubbornly yelling to hold the line (from both sides) they are completely disregarding any type of risk management. To each its own, I’m rooting for everyone to make money, but if you’re going to trade this market (both public and private) you need to know both the probability and the degree of your downside.
Markets don’t necessarily have to be efficient. You can argue they haven’t been efficient for over ten years. But there absolutely needs to be trust (or faith). And trust goes both ways. Not that anyone wants to admit it, but the market is a symbiotic ecosystem. Hedge funds / banks need retail and retail needs hedge funds / banks. Market takers need market makers. Market makers take on risk. Market makers then hedge said risk. And the cycle continues. When there is trust in the system, and everyone understands who does what and why they do it, it’s easier to manage one’s risk.
On TV, on Twitter, on blogs, in this newsletter, you’ll see “this is not financial advice.” From here on out, there needs to be the addendum, “this comes with a sh*t ton of risk, so invest accordingly.”
// In August of last year, Morgan Housel, the author of The Psychology of Money, wrote about The Three Sides of Risk and tells the story of how he barely missed the avalanche that killed two of his friends.
“But once you go through something like that, you realize that the tail-end consequences – the low-probability, high-impact events – are all that matter.”
Related, one of the better books on risk is Against the Gods, the Remarkable Story of Risk, by Peter L. Bernstein.
// Over the course of the week, a hundred different ideas went through my head as to what to write about. Some I’ll save for another day, but trying to stick in the private/public lane, here are my cliff notes:
If you need to be an accredited investor in the private market, the same should be true for the public markets. You have to be accredited for the private market because of the supposed risk. However, you can argue the public market is even more risky at this point. Too fast and too unpredictable. With that said, brokers use to have suitability requirements for different levels of trading, but in the last few years the suitability requirements have slipped. Maybe those should be strengthened again. I say this tongue in cheek, but really it shows that the accreditation for the private market should be loosened. In the private market you actually have a better handle on your downside and it’s a market where time moves slower. More investors need more access to the private markets which actually could dampen volatility because they’re not frantically chasing public market returns.
I wrote this in June, ‘Same As It Ever Was,’ in talking about market dynamics. I could have copied and pasted today to make the same point. Similar to what I stated above, certain market mechanics have created a system that has and will push more investors to the private markets as rules of the game have changed. Popular reasons for investing in the private market have been “companies staying private longer,” “passive investing,” “Fed and QE,” “finding edge earlier in the game.” A new one you can add to your pitch is, “public markets have become too unpredictable” and/or “I have a better handle on my risk by investing in the private markets.”
BUT, as much as we (I) like to poke holes in the public markets and some of its faults, the private market needs the public markets, especially one that is stable. We should all be rooting to get out of this mess where calmer heads prevail. The private/public market will continue to converge, but there is no private market without the public market. For now it’s the backstop, the ripcord. If it wasn’t for the Fed and the Treasury stick saving the public market in March of last year there would be no influx of SPACS. There would be no complaining of IPO pops. And there would be no follow on rounds three months after the last at 5x the price.
Private & Public News From the Week
// Private
Bracket Capital Raises $450 million (Fortune)
Coinbase Plans to Go Public Through a Direct Listing (CNBC)
Carta Announces Carta SPV
Robert Downey Jr. is Launching a New ‘Rolling’ Venture Fund (TechCrunch)
Investment in Space Companies Hit Record $8.9 Billion in 2020 Report (CNBC)
// Public
Wall Street Hedge Funds Stung by Market Turmoil (WSJ)
Citadel, Point72 to Invest $2.75 Billion Into Melvin Capital Management (WSJ)
Hedge Funds Rush to Get to Grips With Retail Message Boards (FT)
Day-Trader Bets on AMC Hand Gig Gains to Silver Lake and Mudrick (FT)
Wall Street Split as More Companies Hit Sky-High Valuations (FT)
// Longer Reads
Keith Gill who drove the GameStop Reddit mania talks to the WSJ.
Best explanation on clearing and the issues underlying the current trading environment. (h/t x2 Max Power)
As SPACs Hunt Targets, They Could Disrupt VC World (Crunchbase)
How Mike Speiser and Sutter Hill are Changing the Rules For VC Investing (CNBC)
Sacra released their Startup Recurring Liquidity Calculator.
Raoul Paul’s long article The Inconvenient Truth About Crypto.
Andrew Chen writes about Investing in Clubhouse.
Volatility
// If you’re venturing into the option’s market, here are a few resources:
When I first started trading we had to read the book, Option Volatility and Pricing, by Sheldon Natenberg, which is consider the “options bible.” There is also a pdf online that I believe has all the material.
Here’s an interview of Natenberg talking to tastytrade.
Meb Faber podcast where he talks to Kevin Davitt, John Hiatt of the CBOE, covering the VIX and tail risk strategies.
CBOE Quotes Dashboard. “Vol” here is actually “volume,” and “IV” is “implied vol.”
Christopher Cole of Artemis Capital Management is one the best sources when talking about volatility. Here’s Cole talking to RealVision about volatility and risk. This is from 2017, but these same themes resonate today. Here’s another interview with RealVision from July 2020.
For my vol nerds, Cole created this video in 2012. You have to give it a minute.
Data
// Grabbed this from The Market Ear which took it from Artemis Capital Management.
// Thanks.
This newsletter is created and authored by Bryce Tolman and is published and provided for informational purposes only. The information in the newsletter constitutes the Author’s own opinions. None of the information contained in the newsletter constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You understand that the Author is not advising, and will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in the newsletter may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.