A little bit of paranoia is always healthy.
In the 1980s, the totalitarian fear was that some overenthusiastic government agent would go to the library and pull your library card to see if you were reading seditious texts.
Seems a bit quaint now, doesn’t it?
Hedge fund managers go about finding investment ideas in a variety of different ways. Some target stocks with low multiples, while others look for growth names, and still others combine growth and value when looking for ideas. Some active fund managers use themes to look for ideas, and Owen Fitzpatrick of Aristotle Atlantic Partners is Read More
It didn’t at the time.
Fast forward to today.
- Facebook knows who your friends, friends of friends, and acquaintances are. It knows what you look like, and what your friends and family look like. It knows what TV shows you watch, what music you listen to, and in all likelihood, your political activities.
- Amazon is today’s library card—it knows every book you’ve ever ordered, along with more pedestrian purchases like vitamin supplements.
- Netflix is a database of pretty much every TV show and movie you’ve ever watched.
- Google has a repository of every Internet search made by every American citizen.
Those four stocks have outperformed over just about any timespan.
Does anyone else find it more than a coincidence that they are also potentially the biggest threat to online privacy?
Upon hearing the Edward Snowden revelations, we discovered we were living in a turnkey totalitarian state.
We learned that the NSA was using pretty much every electronic means available to spy not just on our enemies, but also our allies—and every American citizen.
The intelligence services derived this authority directly from the Patriot Act. This should serve as a reminder that any piece of legislation that passes virtually unopposed in the midst of a crisis is probably bad.
So yes, it is likely that the government knows who your friends are, your political activities, what books you read, what movies you watch, and what you search for on the Internet.
I would bet that it knows all of these things.
Does it care?
Probably not, unless you simultaneously search for “ISIS” and “Improvised Munitions Handbook.” But the great libertarian fear is that one day we will have a government that is not so benevolent.
Too Important to Fail
Now I’ll get to my point.
It is one thing to bet against Facebook, Amazon, Netflix, and Google—to say that they are overvalued, and to sell them short. That may be a good trade.
But it is unlikely that they will ever, ever go out of business. And it doesn’t really matter if they are profitable. They aren’t “too big to fail,” but “too important to fail.”
I blow minds for a living.
These companies vary from insanely profitable (Google) to somewhat profitable (Facebook) to not at all profitable (Amazon).
People have been complaining about the insane valuations for some time. They’re missing the point.
As I said, it’s not a matter of how profitable these companies are—but how important they are. Not just to you and me, but to Uncle Sam.
Do you think Uncle Sam has an interest in seeing Facebook fail? And to think there was a time when people thought it was the next Myspace. It is immune to obsolescence. It will be around for a hundred years.
Having Said All That…
I’ve said before that the US stock market is not a bubble.
I’d like to revise those comments—the US stock market is not a bubble, except for a handful of stocks.
Tesla loses money on every car sold and is worth $60 billion. Investors have given Amazon 20 years of runway and there is hardly a dollar of profit.
Which leads us to our quandary:
- You pretty much have to own these stocks, because otherwise you underperform the index.
- But you can’t own them, because they are stupid.
What to do?
It gets back to our discussion on volatility, actually.
- You can’t be long volatility because the market doesn’t move.
- You can’t be short volatility because it’s too cheap.
Let’s combine these two concepts.
Stop trying to trade the stupid VIX and go back to plain vanilla calls and puts.
The cheapest options on the board are slightly downside puts in Facebook, Amazon, Netflix, and Google.
There’s no skew.
Implieds are low.
The market is giving you free convexity, practically.
If one of these names has a 10% blowup, it’s a big winner.
It also has the advantage of being the dumbest trade imaginable. If you went on CNBC and said you were buying puts on FANG, you would get laughed off the set.
Which means it’s probably the right trade.
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