Unicorns And Anti-Gravity Shoes
It’s a normal Monday morning and you’ve just received a new email so of course you open it immediately because that’s what everyone does. The email is brief: it tells you that XXX stock will go up in value tomorrow. You shrug and get on with your day, quickly forgetting all about the odd email. Until Tuesday, when you receive another email. This is also brief: it points out that XXX stock did indeed rise as predicted, and the new tip is that ABC stock will go up tomorrow.
Again, you shrug and get on with your day. You’re not really sure how you got onto this email list but, what the heck, it’s harmless. When Wednesday rolls round and you open up the email reminding you that both XXX and ABC went up as predicted, you feel a tiny frisson of interest. But, hey, twice in a row is probably just dumb luck. Today the email tells you that ZZZ stock will go down.
Come Thursday, you’re actually slightly eager to receive the email. Sure enough, ZZZ went down as predicted. Three in a row is pretty impressive, so you’re curious to read what the email tells you about YYY stock: it will go up. And come Friday you’re actually excited to see that, wow! YYY went up exactly as predicted! So that’s four in a row, no way is that luck, whoever puts this email together clearly knows their stuff.
On Saturday you get another email saying, sure, the markets are closed today but be patient because on Monday XYZ shares will go up. On Monday you check the share price online yourself and sure enough, by end of day XYZ has gained 1.7%. OK, so this is serious stuff. Five good calls in a row and no misses. Now you want to know how you can benefit personally from whoever’s playing the market with infallible accuracy.
Luckily for you, on Tuesday you get an email reminding you (how could you forget?) that they gave you five perfect predictions in a row. This is because they’re using a sophisticated AI system that calculates billions of probabilities and spits out a handful of absolute certainties each day. The folks who created this system have already made hundreds of millions of dollars and now they want to share their good fortune so that more people can stick it to the suits on Wall Street. But it’s a limited time offer: if you can wire $10,000 to their brokerage account before end of day, they’ll guarantee you a return of over 200% by the end of the week.
What could possibly go wrong?
Astonishingly, every time this blatantly obvious scam is run, thousands of people fall for it. The human brain is atrociously bad at understanding probabilities and even worse at avoiding wishful thinking. (In case you don’t already know how this scam works, it’s explained at the end of this article.)
While the above is clearly fraud and therefore illegal, how about this next scenario:
A well-known self-publicizing tech entrepreneur buys a majority shareholding in an electric car company. He keeps announcing dates when vehicles will roll off the production line but he keeps missing every date. When cars eventually do appear, they do so in volumes that are a fraction of what was promised and there are significant quality issues. This doesn’t dissuade the entrepreneur, who continually promises things that his company reliably fails to deliver. Amazingly, the share price rises as investors buy into the somewhat nebulous vision and outlandish claims the self-appointed CEO makes at every opportunity.
Although the company misses every target imaginable, the share price continues to rise, boosted by an endless escalation in hype. No longer is this an automobile company, it’s a save-the-planet battery autonomous vehicle everyone will have one because this is the future company.
The CEO displays a truck ideal for posing up and down 280 but totally useless as a truck. The CEO claims he’s about to reveal a “million mile” battery technology that will replace the rather embarrassing collection of wired-together phone batteries that all his current products rely on and which have to be (expensively) replaced every five years as two separate but troublesome phenomenon (interphase ion loss, and gradual destruction of the cathode) cause a massive degradation in performance. Not only are these regular battery replacements expensive but they’re also environmentally harmful as producing lithium requires a lot of energy and is rather polluting, and as yet there’s no good way to recycle old lithium batteries, which are highly toxic. So the “million mile” battery (e.g. a battery that will last a million miles of EV use before becoming too useless to retain) would be a game-changer.
Most people imagine the “million mile” battery means a travel distance of one million miles on a single charge, whereas it is supposed to mean a million amp-miles of duty life. Worse yet, those few who understand what the phrase means buy into it completely, being in no way skeptical about the unverified claim, because hey, who wants to bother learning some basic material science? And besides, it’s a great story. Miracles do happen, right?
And so the company’s share price rises again.
Doubters are told that even if the company’s margins aren’t great, autonomous vehicles will mean that the company can compete with Uber and Lyft (and presumably lose money with every ride, just like Uber and Lyft do….), which means that a thousand trillion bazillion dollar market cap is a true reflection of the company’s potential. And so the share price rises yet again.
The question is: what difference is there, if any, between the email scam at the beginning of this article and the perfectly legal share price inflation of Tesla?
It takes only moments with an Excel spreadsheet to reveal that Tesla’s current valuation is so high that there is literally no way in the world that it can ever make enough money at a large enough margin to justify the enthusiasm with which naïve souls are pouring money into the stock. A few years ago someone pointed out that Tesla’s valuation then (which was when the company was around $400 per share versus $2,700 today) meant that by 2030 every single car sold in the world for more than $50,000 would have to be a Tesla. Which clearly was never going to happen even in Musk’s wildest drug-fueled fantasies. So how did we arrive at a point where the shares are so clearly hyper-over-valued?
We got here for the same reason that so many fall for the email scam: we are simple creatures and we want to believe. We want to believe doctors know what they are doing (surprise: far too often they are clueless), we want to believe our leaders know what they are doing (more and more difficult to cling to this illusion these days), and we want to believe that nice things will happen to us because we really, really need the money. If something increased in value yesterday then surely that means it will increase again today. Because that’s how things work, right?
Which brings us to the anti-gravity shoes of this article’s title.
Yes, it would be lovely if anti-gravity shoes were real. Not least because it would mean that all sorts of anti-gravity products could be created. As 40% of US citizens are obese and more than 86% are overweight, this would literally ease most people’s burden. Furthermore we could have whizzy new aircraft and Star Trek-like magic spaceships. Even Musk could perhaps finally deliver on his much-hyped billionaire’s panic room on Mars.
But anti-gravity shoes don’t exist because physics, unlike share prices, doesn’t respond to wishful thinking even in the short term. When something seems too good to be true, that’s because it is too good to be true.
Sad update: there are no miracles in life. Even smart & stable venture capitalists have to learn this lesson the hard way thanks to “teaching moments” like WeWork among many, many others.
It’s so often a truism that the easiest people to con are those who imagine themselves to be smart; however it’s even easier to con dumb ignorant people, and that’s most of us.
But hey, don’t let this downer article prevent you from benefiting from my personal and totally infallible insight into amazing new investment opportunities! Just click on the link below to be added to my mailing list and you’ll receive daily tips that absolutely can’t miss.
(And I promised you an explanation of the email scam, so here it is.
How the scam works: Buy an email list with 40 million addresses. On Day One, send 20 million an email saying XXX stock will go up; send the other 20 million an email saying XXX stock will go down. Wait & see what happens. Discard the 20 million to whom you sent the wrong prediction. Now split your remaining group into two groups of 10 million. Send half an email saying YYY stock will go up and send the other half an email saying YYY stock will go down. Wait & see what happens. Discard the 10 million to whom you sent the wrong prediction. Continue for 5 days, at which point you’ll have sent “successful predictions” five days straight to a group of 1.25 million people, quite a few of whom will believe you’re a stock price predicting god. If even only one-tenth of one percent fall for your “send me $10k and I’ll double it within a week” pitch that means you walk off with $12.5 million, all by spending a minute a day sending out automated email blasts.)