Dan McMurtrie with Howard Lindzon

Link: https://howardlindzon.com/dan-mcmurtrie-founder-of-tyro-partners-llc-joins-me-on-panic-with-friends-to-discuss-information-overload-and-behavioral-investing-ep-151/

About Dan: Dan McMurtrie is a 28-year-old founder, portfolio manager, and Twitter phenom more commonly known to his nearly 60,000 followers as @SuperMugatu. He’s an insanely funny, original and inspiring person who knows a lot about social media, maintaining an audience and the behavioral side of investing. Dan’s New York-based hedge fund, Tyro Partners LLC, focuses on trends and supply chains driving technology, healthcare, industrial, and consumer markets.

An insight common to making money and making people laugh

Something everybody knows it to be true but no one’s speaking up about it being true

On people struggling to make sense of the world

It’s a paradigm shift to a networked world…going from one-to-many media to many-to-many media, and having cycle times for communications go down to sub-second, meaning the number of cycles, the number of communications is going to infinity really fast. That’s leading to all these weird neurological effects because your brain is not used to having hundreds or thousands of opinions scattered at it. Your brain is used to thinking that an opinion from somebody means something, which is super wrong. And so I think this knee-jerk reaction to dismiss things that well-trained investors in the past three years have developed is actually the biggest weakness you can have, because everything now is like this kind of meta game of “it looks absurd but it’s actually not. Actually you shouting that it’s absurd, is what’s going to give it the audience that makes it real!”

The output of our quickly networked world is disrupting seasoned investors’ heuristics

It’s scaring the shit out of people. They’re looking at this and they’ve been around the block a few times, and their experience is betraying them because they’re seeing things that are so behaviourally horrifying to them that they don’t realize that they’re then becoming just instinctive and knee jerk, And they’re not running basic numbers [and asking themselves] “Is this a material amount of money?”.

[consider the lazy argument against Dogecoin that it has unlimited supply]

Is it actually unlimited supply? I’m like, “Yes, but is it unlimited supply forever. No. There’s a more nuanced point  that it’s not unlimited supply at any individual point in time, there’s a rate limiter on time with those points, which is why this pump thing is working. 

An example of how brains get hacked in this networked world, orchestrated by the guy that oversaw such hacking at Facebook

There’s a technique that I think Chamath does that I call “the 90% rule”. What you do is you say something that’s technically accurate, but like maybe 10% off of how a professional would say it, or maybe it’s 10% not correct, but it’s in the spirit of correct. For example, Chamath said something on Twitter — that he was up 120 basis points this year, and the market’s up 30 basis points, so he said he’s outperforming by like 300% or 400% or something. [Everyone jumped on Chamath for this], but do you actually think that Chamath doesn’t understand basic math. Do you think the guy who led monetization of mobile advertising for Facebook doesn’t understand the way things are reported. The guy who’s leading several SPACs, who’s talking to bankers every day, who has a sophisticated family office. You could dislike the guy for a million things, but basic numeracy is not one of them. And yet the knee jerk reaction [by people on Twitter] is that he’s wrong. I think the reality is, and here’s the brutal thing about Twitter, most people on Twitter are strivers. The people that are working really hard, they’re trying to make it, and candidly for most people it’s not working out. Especially the finance guys. The guys who went to finance, they’re not getting the money. It’s not working out. They’ve got the CFA, they’ve got the MBA, they worked at Goldman, they went to Wharton and they’re still not making a fraction what they thought they were. They’re not moving up. It’s not working out because of top-down industry dynamics which you’ve talked about ad nauseum, but that makes them really bitter. They’re really bitter because they feel like they’re getting screwed. And so when they see this guy, who’s making billions of dollars, making a beginner mistake, that would have gotten them fired, the amount of unrighteousness or injustice feels so massive. It overrides all logic and reasoning.

Nobody is immune from the brain-hacking that the networked world is doing, but the first step to understanding it is being aware of it.

My big thesis right now is technology is being used to program people, not the other way around. In the frickin documentary on Netflix [referring to “Social Dilemma”] is half of the stuff and [Chamath] is doing it. It’s crazy how effective this stuff is. A great example of this was when I tweeted a stupid joke that “no one actually knows what’s in chalk, they just teach you to accept the premise when you’re so young, and they just go with it.” And you have people, like real people with PhDs responding like I’m a fucking idiot. Everybody knows what chalk is. Don’t you see this as tweeted from my iPhone?! I tweeted this from a supercomputer in my pocket. Even if I didn’t know what chalk is, I could obviously put faith in it. [This is obvious if you think about this] for more than a split second but you have people who have multiple PhDs from places like MIT, who are completely hacked. Their brains are being hacked. And they look like fools, and they think they think that they’re smart because they’re speaking. Not to validate what they’re saying. They’re speaking to validate themselves, and that’s the weakness that all people have. This is the dark arts that you have to study now.

Change is occurring at an accelerating rate

There’s a concept called the Overton window, which, not to be like a dropper of concepts but Overton Window refers to what like types of political policies are acceptable to talk about in public. [A few years ago universal basic income was considered a quack idea], last year Donald Trump initiates universal basic income. Admittedly because of a virus so I’m not saying it was a wrong move, but you need to understand how insane that shift is society that that went from unthinkable to expecting it, and actually the people almost revolted. I mean I was in Richmond, Virginia when the protests were happening there. We were watching the breakdown of society happened, because there was some uncertainty around it that changed in a year.

You can’t put your head in the sand about the role of social media. The genie is out of the bottle. Dan sees evidence that some managers do not understand that reality.

The thing about Twitter within hedge funds or institutional endowments that nobody really wants to admit is, even if the CIO isn’t on Twitter, (and if he isn’t, it’s only because he’s too old) all of their analysts are! So, like there’s this huge issue right now of mass group gaslighting of mimetics and ideas spreading like viruses and if you’re a CIO right now, you probably don’t actually know what your firm’s sourcing mechanism is (unless you’re pushing all your ideas down). The number of times I meet with the senior guy who runs a fund, and he starts rattling off ideas I’m like “Yo, you know your analysts ripped all of that from Twitter right. And they’re like ‘What are you talking about?’ and I’m like, Look, there are these cliques of people on Twitter, I’m not even I’m not saying they’re bad ideas, but they aren’t original ideas. I’m just telling you. I’m not going to doxx your boy, I’m not going to get anybody in trouble, but I’m just telling you that you don’t know how your own investment process works. You don’t realize you’ve already been fully infiltrated by social media.”

Instead of fighting this new reality, adapt to it.

[You’ve been infilitrated by social media] but you actually kind of want that because if you are the only guy who’s not participating in these things [you are missing important context]. For example in January, and the end of December [during the stock squeezes]. I’m not particularly smart, especially relative to other hedge fund guys, but I was seeing where the liquidity was in the market and I was seeing the type of stuff happening on StockTwits and Reddit and all these other places I mean there was just gonna be just some crazy stuff happening. I went to my clients and said “Look, I’m not gonna play this game. I’m gonna take exposure way down. Yes, I believe I should be short half these companies, but I’m short the stock not the company. I’m not messing with this.” I had several people say I lack conviction, long-term investing blah, blah. Then the next three months it was just a hedge fund after hedge fund blow up. This is not going away, it’s not going back because it’s not 2000. This is not instant messaging. Last year was the first year that most waking hours for humans were online, and everybody was on one to five websites. Nobody really understands how significant that is. Everybody’s now networked, all the time 24/7.

The bar for what is considered table stakes is rising. Psychology and the repercussions of being highly networked should receive more of your attention to gain an edge.

People don’t realize how fast these big changes happen and so when I just look at some people who think we’re gonna, we’re gonna be good investors because we do more conservative discounted cash flow analysis than the other guys I’m like, “You’re like a dude with a horse and a saber walking into WWII. You’re about to have a really bad time. Like I can’t even explain to you the ways in which you’re going to get beaten down, and you’re not psychologically prepared to deal with any of this stuff because it’s gonna seem random. It’s just gonna be chaos. There’s gonna be bombs dropping and machine guns and you’re not gonna know what either of those things are. It’s just a really weird time to be an investor and I think you have to move the psychology stuff up in how you’re relating to the world into a really forefront position. Or these systems are just going to eat you.

How Dan’s fund is adapting

We’ve continued to zoom in on this behavioral stuff. Everything else is table stakes. Of course, you need to know how to value something, you need financial analysis, you need to be able to read transcripts, and do value research. But that became commoditized sometime between 1995 and 2010. Look at the number of people who have CFAs or how many people went through banking here or internationally. Companies like thedeal.com. You can go online, hire somebody anywhere in the world in like 10 minutes with a contract and a 1099.

Right now, I think the markets become a pure metagame of the game. Where does it go from there? The thing is humans are still very human, and actually, the rise of passive means the humans are a smaller percentage of the market. When they move at once they have a bigger price impact, because it’s just everybody running out the fire door of a theater. It’s as old as the hills. It’s all the same stuff again but remixed and much faster. It’s still music but it’s going from jazz to dubstep, way more aggressive, way faster, with all these different games being played. So we spent a lot of time trying to understand the fundamentals and what’s going on in these businesses and what’s going on in the supply chain, but also what is the psychological game going on in the market.

You must find a lineup where you’ve got great fundamentals, good business improvement, a really long-term runway, and you have some really distracting psychological thing that’s distorting the price. Or more importantly, maybe in this era, mandate arbitrage. As more and more capital is just driven by somebody’s investment policy statement, or an endowment investment policy statement or the S&P index rebalances. Those legal mandates are really powerful and just getting bigger. So we want to see a clustering of understanding why the opportunity exists. Because of legal mandate, because of agency costs and behavioral things like [where investors] can’t go to LPs and own it because they are going to get upset. If we see that plus it’s a good business [that becomes a potential opportunity].

This bit reminds me of the style of trading I’m more accustomed to where we don’t predict so much as try to “see the present clearly”. I’m more accustomed to measuring what is happening now than predicting tomorrow. (An example from my world would be owning optically expensive volatility because it’s carrying well)

We don’t try to predict. We try to observe. We might have a starter position on but when we see thesis confirmation, we’re going to add. What we do not really like to do, is make a big bet because we think x is going to happen. I don’t think it’s necessary because I don’t think the market adjusts to new information as well.

Dan loves Warren Buffet but scoffs at his cargo-cult imitators

I’m a huge Warren Buffett fanboy. My favorite people in investing are Warren and Charlie and then my least favorite people in investing, generally speaking, are people who tell you that they’re fans of Warren and Berkshire.

A great filter is to ask them “what’s your favorite Berkshire business?” If they say See’s Candy, you know that they know nothing. Nothing about Warren Buffett or Berkshire Hathaway. The reason is Warren Buffett is probably one of the greatest marketers to ever live. He’s built this brand. He’s built this brand that’s hyper-consistent. That allows him to not answer any critical questions, because he doesn’t actually have to defend objectively right or wrong. He just has to defend consistency with his brand.

There are several value investors that really market themselves as like Warren Buffett or Charlie Munger brands. Baby Buffetts. They all have kind of good records of not losing huge amounts of money but none of their records would stand on their own in a vacuum. They live off this same narrative. Recently I’ve had some interesting interactions with a couple these people. You ask them “How do you think about your business?” They’re very candid. “Look, I am looking for somebody, where that’s what they want. They want to feel that they’re investing in a long-term, conservative thing. They’re not going to lose their money. They will compound well and they get to feel like they’re part of the church of Buffett.”

At the end of the day, what are they selling is a psychological safety blanket. They’re not selling an investment product at all…they will only take inbound clients because they don’t want to go out and convert anybody. Look at how these [investors] behave. If you’ve ever studied cults, you see the exact same behavior. I don’t necessarily think it’s malevolent or bad, but I think that in the modern era, with everything that Warren Buffett did now being sped up 100,000 times, and on Twitter everyday with people doing these explainer threads and Substacks. These are all the same psychological manipulation techniques. It doesn’t mean they’re malevolent. If you really understand how Warren built his public persona, why he built it the way he did, and how he changed his business at every scale level of capital [out of necessity] you’d understand that the idea that Warren Buffett The Empire Builder, bears any resemblance to Warren Buffett The Ruler is naivete.

Why 2020 made Dan optimistic

Looking forward, I think the takeaway from last year, has to be a profound optimism for humanity. We just took a global pandemic on the jaw. As pissed off as everybody is we’re calling it the Five Aces Problem. It’s like you being dealt a poker hand with four aces and people are like “It would be good if we had a fifth ace”. There’s no fifth ace in the deck! You can tap something on your phone and have a pizza in 20 minutes! You can have a date in 5 minutes. You can have anything you want delivered to your house within 2 days. Like woe is you that you couldn’t get the specific dumbbells you wanted that week. During quarantine, we were living a better life than people in the 1960s were able to live. People in the 25th income percentile now live better than Rockefeller did. We’re going up a curve that is getting exponential so people are not understanding how insanely awesome the performance last year was of humanity. And sure we have some supply chain chokeholds leftover from last year. Yes, there are obvious knock-on effects. We’ve got some issues around the government explicitly putting all risk onto the dollar and making some big bets on modern monetary policy. Those are generally concerning things, but they are super obvious. I just don’t see how you can’t be optimistic about our ability to solve these problems.

I think one of the things people struggle with, I just wrote about this, is as the world gets better, as you go from being a caveman to being an office worker, your job is moving further and further away from the kind of base Maslow needs. You’re not hunting a saber-toothed tiger, you’re typing in data entry or doing social media posts. That’s why every generation looks at the next generation and thinks they’re soft as hell. You know “they had to walk both ways to school uphill in the snow.”

It always happens like that. That’s what progress is.

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