Shopify, Spotify and Now Snapchat? What Is With The S’s…?

I have been long Shopify forever it seems.

Last month I added Spotify to my portfolio and shared the reasons here. It has rocketed since.

Last week I added Snapchat to my portfolio as it broke out above $20 and closed the week with a $32 billion valuation…

Snapchat is now worth more than Twitter.

How? Why?

I like this explanation from Mr. McCormick. Have a read. Snapchat might be the next great platform that everyone forgot about.

I have watched my kids continue to use $SNAP post college so now Snapchat is for kids, teens, college kids and post college.

Pretty soon I have a feeling I will be using it.

Modern Thinking and Investing and Jim O’Shaughnessy Joins Me Again On Panic With Friends

I got this message from a Stocktwits user Matt yesterday and it stuck with me:

I love the markets.

I love technology.

I love all things modern (B&B Italia, LULU Lemon, Restoration Hardware, contemporary art) so it is nice to hear my thinking and strategy is modern.

Rachel starts to work next month at Rally Rd for her first job post college. She is 22 years old and already a modern investor with a Coinbase account, a Robinhood account and helping Rally acquire and IPO rare assets like Birkin Bags.

Just this week I ordered the book Reminiscences of a Stock Operator and asked my son Max to read it.

Max chose the modern way to read the book by ‘listening’ to it on Spotify while he drove back to Phoenix.

I would like to think that my modern way of doing things is really just packaging and style.

Speaking of modern and style, Jim O’Shaughnessy joined me again on ‘Panic With Friends‘. He was my first guest on the podcast back in March. The $VIX was closing in on $90. Today the $VIX is down to $30 and the panic is more like FOMO.

We talk about FOMO and how quant investing is anti narrative, Jim’s change of heart re ‘guaranteed basic income’, how the next generation might spike the ball on Vanguard, how owning 500 stocks is dumb, the importance of situational awareness, his new podcast ‘Infinite Loops’ and the game of ‘Risk’ applied to markets and investing.

You can listen here on Spotify (please subscribe), or on Apple podcasts (just search my name).

PS – Here is the first podcast I did with Jim back in March.

Robinhood Robinhood Robinhood

Robinhood is drawing a lot of attention these days.

Success breeds scrutiny in the USA. More so than failure.

There is a dizzying amount of misinformed hot takes about Robinhood selling order flow. Let’s be clear – Robinhood lives up to its name – it created free trades for consumers by getting high frequency traders (HFTs) to pay for it. That consumer surplus was passed to subscribers, revolutionizing and permanently changing the discount brokerage industry.

Admirably, Robinhood discloses quite clearly how they generate revenue, but one thing they neglect to explain well is the rationale behind selling order flow, and that causes misplaced confusion on whether that practice affects the quality of trading (it doesn’t, it improves it).

The real story is life has never been better for a retail trader.  Let’s clarify their business model. Robinhood makes money six ways, and the first five aren’t controversial:

1. Gold accounts at $5 / month: By far the most straightforward. A monthly fee for extra benefits

2. Net Interest Income: The spread between interest Robinhood earns on customer cash, versus what they pay the account holder in interest.  

3. Margin Fees: The cost of borrowing funds from Robinhood.

4. Securities Lending: Securities lending is the short term loan of securities (stocks) in exchange for cash / collateral. This is how short sales are effected.  According to iShares2, the blended average revenue this generates is 3-5 bps per dollar of securities.  This practice is standard and for example is how Vanguard and other large funds reduce fees on their products.

5. Interchange Fees: Robinhood issues a debit card, and when used to buy things, the retailer pays a service fee to Mastercard (the network, ~2-3%) and to Robinhood (the issuer, ~21 cents + 0.05%)

Now, the one that mixes people up:

6. Payment for Order Flow: Before we do the what, let’s do the why.  

Whenever anyone enters an order, whether Robinhooder, Financial Adviser, small hedge fund, large mutual fund, the first question is one, is there liquidity for this order? Two, if there is, who fills it, and how?  Thanks to Regulation NMS, retail orders are required to be routed to the lowest price – so that takes care of that – retail trades will get the best price at the moment in time they submit an order that is actionable.  Good news.  

Question two, is who fills it? A market maker will fill the order, and whether a person or HFT, market makers earn money on the bid/ask spread. In general, a market market / HFT is agnostic to buying and selling for a penny, as over the course of hundreds of thousands of trades per day, the pennies add up. That critically assumes a random distribution of buys and sells.

The risk to a market market though is that the buys and sell are not random.  If behind a 100 share order of a $100 stock is another 5,000 100 share buy orders because the buyer is a giant fund, then the market maker will get run over, and lose money.  This is called “adverse selection” as in, they were counterparty to orders where they didn’t get to capture the spread.  

If a market maker can effectively guarantee that it will never trade against an institution (presumed to be knowledgeable and large) and instead can trade against a retail trader (presumed to have random trades that are small) then it lowers its adverse selection.  

By buying order flow from discount brokerages, retail traders win because the payment for their flow subsidizes their trades.  The retail trader wins because they already legally have to be routed to the lowest price.  The HFT wins because it lowers their adverse selection.  Who loses? Who is actually paying the cost here?

The Robinhooding at question?

Institutions.  The quality of fills at institutions has become slower, and more expensive, because they are competing for, at the margin, less liquidity.  

Lastly, if you believe in looking where the bread is buttered so to speak, in the quarter Schwab announced $0 trading to keep up with Robinhood, their daily trades on the platform went up almost 100% – and selling that orderflow amounted to a whopping … two (2) percent of revenue.

Of course…don’t just take it from me (I am a biased investor and happy user) or Danny Jessy who is a CFA and did most of the work on this post. Here is a take from Dave Nadig at ETF Trends.

PS – I like writing about Coronado more than Robinhood, order flow and day trading so will get back to that important topic tomorrow!

I Love Coronado

Life has been good here on Coronado the last week.

Rachel and I are spending some quality time before she starts her career next week. Max came to visit and he looked at us twice, Knut came to the house from Phoenix to set up the summer podcast studio and Sheel came to hang with the family.

Last night Ellen and I took Lindzee for a run on dog beach. Lindzee loves to run but rarely gets a chance off leash. The beaches and the island is very quiet because the Del Coronado hotel remains closed for COVID. I love the silence, but I hate the fact that the small local businesses are in pain.

I have also had two friends come visit me for 30 mile rides. In all my years here this was the first two times that friends from Los Angeles made the trek.

I track my rides on Strava and this year I am on pace to shatter my miles personal best. Last December I sat on my couch sick, weak and recovering from surgery so I am lucky and grateful to be having such a fun year of fitness.

Yesterday, I blew both my tires in the first mile. I felt bad because my buddy Mike had driven down to get the ride in. It would have been easy to throw in the towel, but Mike was ok with walking back to the Coronado bike store and see if we could get help with the tires. Within 45 minutes we were back on the roads. I am glad we stuck it out.

My routine right now starts at 5 am with the daily blog posts and 6 am Zoom calls. I get a run and or bike in after the markets close and the rest of the day is zoom calls and networking on the porch. The evenings have been board games and bad Rachel Netflix choices.

It is weird to be more productive at my job from home all these months than from the road but it is…at least for now. No complaints.

The Pressure Of Large Numbers and Some Acquisition Predictions

Because I don’t short stocks, this continued ramp to the upside in stocks is fun.

I have stopped digging into financials beyond market caps and growth rates because the extra work has not been necessary.

I find myself playing market cap LEGO to help me think about how the large companies get larger.

Apple has now passed $1.5 trillion.

The law of large numbers combined with the pressure to grow (large valuations) are going to lead to some interesting and likely massive acquisitions and even some big changes of business models.

Never shy to throw his hat in the ring is Professor Galloway with his predictions for big technology.

He believes that all that is left for the big leaders is expansion into healthcare and education as growth markets. He shares the links in his post ‘Four Weddings And A Funeral‘.

He also shares some interesting ideas for acquisitions. It is a good read.

I will add a couple…

I think Netflix should buy Peloton. If they don’t I think Apple will.

If the market gods of valuation continue to bless Square…they will buy Twitter. If Square goes up another 50 percent while Twitter continues to stall, Jack will get his way and be CEO of one company. His Next Computer, Pixar, Apple, Steve Jobs moment.

The Gap Year

I was scrolling Seth Godin’s awesome blog this morning for inspiration.

I liked his post titled ‘Consider A Gap Year‘.

The gap year has a terrible name. It implies that the year is somehow wasted, that it’s a gap snuck in between the stuff that you’re supposed to be doing.

But of course, it’s not that at all. Living is what we’re supposed to be doing. Contributing. Learning. Figuring out how to make things better. The stuff we’re not doing when we’re simply complying–that’s the point. Our compliance years are the gap.

And we should commit our time with intention.

If you can afford it, this is a powerful moment to invest in the next chapter of who you are and what you will become.

For an adult, that’s an expensive commitment. To walk away from your freelance path or your job search to dig in to become the leader and connector and expert you’ve always hoped to become.

But for a student, it’s actually a bargain. It’s a chance to step off the carousel of conformity and lockstep obedience and actually commit to a path of your own choosing. Keep your tuition money and put it to work for you, not for some football team.

A month, a semester, or an entire year. A chance to create a change, to make an impact, to cause a shift in your posture that you’ll have forever.

We’ve become ever more suspicious of the bargain that the industrial world has been offering: compliance in exchange for stability. The alternative is to own your path and to do the incredibly difficult work of choosing with intent and then sticking with it.

The discomfort people feel when they consider a gap year is precisely why we ought to spend more time considering it.

I am with Seth…Gap Year is a terrible name.

My last seven months have been a Gap Year. If the nasty hospital stay in November was how it got kicked off, it was still worth it.

COVID forced me to start a podcast and invest in the next chapter of my content creation life. I love sharing ideas and my routine needed a good shaking.

Of course just a small percentage of us do get the opportunity to really do this with meaning and purpose so I am glad I have had this opportunity.

The next three months in Coronado will bring me near the end of the Gap Year and I already feel rejuvenated and ready to do my best work.

Momentum Monday – Stonks Go Down

As a reminder, Marketsmith (by Investor’s Business Daily) is now a sponsor of the weekly show. All the charts you have been seeing in the videos and will continue to see are from Marketsmith. They are offering my readers a three week trial for $19.95. Click this link if you would like to try it out.

Last week we were reminded that ‘stonks’ go down.

In last week’s Momentum Monday post I wrote:

Let’s begin with a reminder that it is frothy out there. When I say frothy, I mean that even I am getting used to stocks making 50 percent moves in a week. It feels like we are getting a bubble inside a recession.

Robinhood traders are having fun betting on airlines and dunking on Warren Buffett…while the dunking is what the media is focused on the BIG picture is how easy it is with Robinhood to be a contrarian to Warren Buffett and Wall Street. From Robinhood to European neobank and brokerage products, people can express themselves even with $100 pounds as contrarian to Warren Buffett in real time.

All that said, I DO NOT think Robinhood traders are driving the market. From watching the price action I believe it is the sloppy government buying of stocks to get prices to where they want to keep the narrative.

This week the Robinhood narrative picked up even more steam. It is a stupid steam. A lazy media pile on.

I do like Alex Danco’s post which introduces the idea that we are witnessing a ‘third’ type of financial bubble. The payday:

There is a third kind of bubble, and it’s happening spectacularly right now. If the first kind of bubble is “everyone thinks the future will be the same”, and the second kind is “everyone thinks the future will be different”, the third kind is “everyone thinks the future doesn’t matter.”

Here is this week’s Momentum Monday. As usual, Ivanhoff and I tour the globe to find the momentum and trends.

Have a great week.

Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For full disclosures, click here.  

A Few Days Of Fintech With Friends

My buddy Sheel Mohnot came to visit me for a few days in Coronado tonight. Sheel is a great fintech investor and I love talking about investing with him. It helps that Ellen and Rachel also love having him visit.

Recently, I had a great chat with Sheel on ‘Panic With Friends‘ to talk about life as a fintech investor in San Francisco starting Better Tomorrow Ventures.

This week my friend Matt who founded the brokerage Stake in Australia had me on his weekly show to talk about fintech and the markets.

Have a great Sunday.

Panic With Friends – Jeff Richards Returns For A Discussion Of FOMO , Investing, and The Future

I had my friend Jeff Richards back on ‘Panic With Friends’ last week. There are now 76 episodes and you can find them all here (or Spotify or Apple Podcasts – just search my name).

Jeff was an early guest back in March and his calm during the panic was needed and precise, especially if you followed any of his stock picks.

In this episode we talk about FOMO in the Venture Capital world, the focus on slugging percentage, Tik Tok (the research link he discusses is here), the continued software boom as SMB’s buying software will create many more Intuit’s, the idea of faster adoption rates and larger markets, Peloton and the continued boom in fintech.

You can listen to the conversation here.

Have a great Saturday.

Robinhood Versus Vanguard!

Before I get started…Rachel and I have been doing the four mile easy cruise ride around Coronado each day and last night I took this picture of downtown San Diego from Coronado. I rarely venture to this side of the island but it was a gorgeous sunset and a pretty evening:

Onwards…

Yesterday I saw this tweet from Bloomberg’s ETF analyst Eric Balchunas that said Robinhood had more mentions than Vanguard:

I chimed in with – The signal is the beginning of the end for owning 500 stocks and being over diversified.

I also chimed in with – Fascinating … the unbundling of ‘fake’ passive investing has begun. This is a huge win for the markets and the instividual and we should be thrilled. Instead, the media mocks it.

What I mean with ‘fake’ passive is the S&P Vanguard ETTF is not passive. It is a constantly changing market cap weighted portfolio of the largest 500 stocks.

We should not forget the fact that a 500 stock portfolio loaded with companies started more than 20 years ago is too much diversification and one of the problems that this generation faces when they invest.

Along comes Robinhood to ‘unbundle’ Vanguard and the other large ETF companies and all the media can focus on is how terrible Robinhood users are at investing (no real data)…(Ben Thompson has written some great essays on the subject of Unbundling and I have used it here to apply to the Vanguard S&P ETF’s).

Vanguard is not going away but they ‘could’ have been unbundling the indexes themselves and beaten Robinhood to the punch with free trading and fractional ownership. That is a real story.

Full Disclosure – Social Leverage is an investor in Robinhood.