How can we be sure of what we’re seeing? That question, posed by China’s great philosopher-skeptic Chuang Tzu over 17 centuries ago, remains supremely relevant today within financial innovation. Here’s what we examined this week:
- Should the sell-side embrace private company research?
- The rise of “investainment,” AI for credit scoring
- Swift, the stock marketization of everything, Bond Street
- Company of Note: Blooom
- Spark: Chade-Meng Tan
What’s the point of sell-side research?
Recently, The Wall Street Journal asserted that sell-side analysts have evolved into “brand ambassadors” who use their ratings to secure institutional access to company management teams. In our view, the underlying problem with this arrangement is that thanks to Reg FD (which states that public companies must disclose material information to all investors at the same time), the value of corporate access could erode over time as information on public companies continues to become easier to gather and as more fund flows are directed into passive investment strategies.
Still, we’re not in the camp that believes sell-side research will disappear; it just needs to be reassessed in terms of who it’s supposed to serve and how much it should cost. We’re also intrigued by the idea of private company research. Take the report (reminiscent of pre-IPO research on Facebook) issued by venture firm Goodwater on Snap’s upcoming IPO. Although it leans heavily on Snap’s S-1, it’s a reminder that there’s no rule forbidding research on private companies. And with a growing number of alternative data providers and useful fundamental, technical and social analytics tools available, we think sell-side firms should amp up their private company research. Sure, private company research isn’t as actionable and incomplete access to company financials makes the job of modeling private companies hard to do. But that’s a good thing, particularly as the line between investing in public companies and private companies continues to blur. Many investors don’t have the time to master a dozen cutting-edge tools to obtain private company insights. Maybe the sell-side can help and in doing so, bring back more art to the valuation process.
Let’s light this candle.
“The past is never dead. It's not even past.” Those words were written by William Faulkner in 1951, but they’ve popped up in our mind as we have watched the explosion of an entertainment category we call “investainment.” Shark Tank is perhaps the best-known example, but there are others. Now, courtesy of Apple, Planet of the Apps will soon be unleashed with the help of Gwyneth Paltrow, Will.i.am, Lightspeed Ventures and others. Will this well-produced show serve to educate viewers about entrepreneurship and technology, or will it encourage DIY angel investors to pour their money into technologies they may not understand? Perhaps both, but we can’t help but see the ghost of Stewart lingering in the background. For those who don’t remember, Stewart was the absurdly-coiffed Ameritrade TV commercial star of 1999 who encouraged his stodgy co-stars to trade online because ‘it was so fun!!!’ “Ride the wave of the future,” Stewart urges to his boss “Mr. P” in one famous spot. In fact, Stewart was right: online trading was the future. But the stock he goosed his boss to buy? Well, that was Kmart. Perhaps the stewards of Apple’s new show — all major cultural influencers — will show a bit more humility and a little less Stewart.
AI for credit scores: Good, bad or scary? The basic gist of this article by American Banker’s Penny Crosman is that credit bureaus and start-ups are trying hard to figure out how to best utilize AI and machine learning, but it’s hard to ensure transparency and protect against bias in the decision-making process. We hope start-ups, banks and bureaus proceed with extreme caution. Our reasoning: even Google’s DeepMind doesn’t fully understand the “thinking” behind the neural networks it has created. In fact, DeepMind recently published a creepy blog post that expressed the company’s earnest desire to figure out how to control the killer instincts revealed in recent games played by the company’s technology. Got that everyone? Even Google is having problems understanding AI.
No blockchain, no cry. The expense and complexities associated with cross-border interbank payments and services has led to numerous calls for the incorporation of blockchain technology to be implemented. While several blockchain start-ups have responded to that call, global leader Swift has just signified that everything’s gonna be alright without distributed ledger technology (for now). In its new global payments initiative (GPI) that was just formally rolled out, there is no blockchain in sight.
The stock marketization of everything. Stock marketization is spreading everywhere, including digital PR and within the enthusiastic community of sneaker investors. Regarding the former, see the attached article on Las Vegas-based Influential, which has created price discovery around “small” influencers whose endorsements are in demand by consumer companies looking for authentic brand association. Concerning sneakers, we are noting Dan Gilbert’s StockX, which just closed on a $6 million round — including participation from Ted Leonsis, Ron Conway and others — to keep track of the fast-moving world of sneaker trading. At the time of this writing, the Adidas Index was trading up, perhaps on the back of surging volume for its Ultra Boost 3.0 Oreo.
Not all SME lenders are hurting. As some well known online SME lenders can attest, maintaining high growth rates and underwriting standards while driving down marketing costs can be a difficult juggling act. At the same time, consider that Jefferies just dramatically expanded the size of its funding commitment to small business lender Bond Street. So what’s the key to Bond Street’s success? One factor is Bond Street’s strong underwriting approach, which is overseen by Jerry Weiss, who formerly ran Citibank’s small business lending portfolio. Weiss strikes us as the kind of guy who knows how to blend innovative thinking with tried and true fundamentals. That’s a good kind of juggling.
COMPANY OF NOTE: Blooom. If you share our view that the retirement crisis is real and begging for innovation, then Blooom is a company to know. The Kansas-based RIA offers a subscription-based automated service that enables savers to outsource the management of their workplace 401(k)/403(b) accounts. That solution fills a notable gap in the $7 trillion workplace retirement account sector as many wage earners don’t have enough assets to lure a financial advisor to assist with portfolio optimization. “We find that, on average, about eight out of ten employees within a company 401(k) plan will have gotten their individual allocation all wrong,” said CEO Chris Costello. “We’ve seen everything from the 28-year old with a 100% bond allocation to the person on the doorstep of retirement with 100% of their nest egg in an emerging markets equity fund.”
CAREER & INSIGHTS
Spark: Recently, meditation has gone upscale. And by upscale, we mean really high-end. Fund managers, tech entrepreneurs, moguls and others who can afford multiple Juicero machines have seemingly taken up meditation with the same enthusiasm they bring to their day jobs. That newfound buzz around meditation has turned off some to the ancient practice — unfairly. Hype aside, a search inside yourself will improve your life and career. That’s why we’re recommending Chade-Meng Tan’s book, Search Inside Yourself ,or any of his other books. As Google employee number 107, Tan could have chosen a life of hedonism, but he instead opted to become Google’s “Jolly Good Fellow” until October, 2015.
Quote of the Week:
A good cook changes his knife once a year — because he cuts. A mediocre cook changes his knife once a month — because he hacks.
~ The Dextrous Butcher, Chang Tzu