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Episode #84: Howard Lindzon, “I Think There’s So Many Ways the Markets are Rigged That I Think It’s Best to Just Follow Along the Trends”

Episode #84: “I Think There’s So Many Ways the Markets are Rigged That I Think It’s Best to Just Follow Along the Trends”

 

 

 


Guest: Howard Lindzon. Howard focuses on the innovation in personal finance and do-it-yourself investing. He makes early stage investments through Social Leverage. His current start-up is called StockTwits and he is a co-founder and now Chairman after 5 years as CEO. He’s also an author of four books.

Date Recorded: 11/21/17

Run-Time: 52:00

 

Episode Sponsor:

PeerStreet – PeerStreet is a marketplace that provides unprecedented access to high quality real estate loan investments.

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Summary: In Episode 84, we welcome investor and entrepreneur, Howard Lindzon.

Howard starts by giving us his background. He was a broker who felt the pain of the ’87 crash. In the aftermath, he got the angel investing and entrepreneurial bugs. He’s currently an investor in Robinhood, and he started StockTwits – which you might think of as Twitter-for-finance. He also runs a fund, Social Leverage.

Given that Howard has spent plenty of time in the public markets, Meb starts by asking about his public market framework, and how he approaches markets today.

Howard tells us that he likes to see which investments are doing well, then try to join in – in his words “classic trend following.” He uses the analogy of the great white shark and the pilot fish. Howard is a pilot fish, following the great white. He likes this approach as “there’s so many ways the markets are rigged that I think it’s best to just follow along the trends.” Howard believes this approach of following the great whites also works in the private markets.

Meb asks about something Howard wrote in regards to learning to invest – it was something along the lines of “open an account, lose money, get a mentor.” Howard expounds on that, focusing on how everyone needs a mentor. Howard wants to help other investors through his own writing and advice. He references Millennials, and how he wants to use tools to help them.

Meb asks Howard’s advice for people who want to learn to be better investors, and how to find a mentor. This leads to a conversation about Howard’s site, StockTwits. Whereas Wall Street felt that people wouldn’t share quality investment information (just keep it to yourself so only you can benefit), Howard felt that many people would want to share their good ideas. Many of these people do exactly that on StockTwits. So, Howard suggests finding someone there that matches your own investing style and temperament, who has a consistent, good track record, and just follow along.

Meb asks which gurus Howard suggests following these days in order to get great information. Be sure to listen to this part to get the specific names.

Next, Meb transitions the guys toward private investing. He asks for an overview on the blurring of the lines between private and public markets, and the development of the seed stage being open to individuals.

Howard tells us things changed in 2007/2008 – it was “the cloud” that was the catalyst, bringing down the costs of starting a company. He says now we’re in a transition stage where many private companies are actually staying private for too long. He references Uber, saying how it feels a bit late for it to go public, but it’s too big to be private.

Meb asks about the realities of private market investing for listeners, noting how some of our pasts guests have had different opinions. Howard has some helpful thoughts you’ll want to hear, but he notes that to be a great angel investor, you need to invest over multiple generations – 20 years or so. You need this time to see an overall crop of investments work out.

This leads into a discussion of Howard’s fund, Social Leverage. Howard gives us the details as to what they’re looking for, as well as the fund goals.

As always, there’s plenty more, including a discussion of when Bitcoin was less than $1, Howard’s publication, The Peloton, and, of course, his most memorable trade. Not investing in Twitter and Zynga when he had the chance comes to mind.

Hear all the details in Episode 84.

Links from the Episode:

  • 00:50 – Welcome and a look at Howard’s background
  • 5:07 – Howard’s broad approach to investing in the public markets
  • 7:04 – Strange that more people involved in trend following aren’t into private equity investing
  • 10:43 – Howard’s financial advice for younger folks
  • 15:53 – What makes a Robinhood so popular with younger investors
  • 18:40 – Howard’s advice for people who want to learn about investing
  • 23:06 – Names for young investors to follow
  • 24:02 – Howard Lindzon on Stocktwits
  • 24:47 – Sponsor: PeerStreet
  • 25:45 – Howard’s thoughts on the private markets and how there seems to be less interest for companies to go public
  • 31:24 – “The Future of Asset Management…The State of Venture Capital…and Goldman Sachs is Spamming me” – Lindzon
  • 32:02 – Looking at how the line between public and private company investing has been blurred
  • 37:05 – Why you have to persist in order to be successful at angel investing
  • 41:15 – Themes and areas of focus in Howard’s new fund
  • 44:44 – Howard’s monthly newsletter – Peloton
  • 47:45 – Most memorable investment
  • 50:37 – Follow Howard at howardlindzon.com, Peloton (monthly service), StockTwits

Transcript of Episode 84:

Welcome Message: Welcome to “The Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com

Meb: Welcome, podcast listeners, today we have a great show. Our guest has more than 20 years of experience in the financial community as an investor, author, conference organizer, comedian, and entrepreneur. He’s also an angel investor, where according to his website, he’s recently been focusing on “Finding companies that are disrupting the old-school financial industry by using technology to increase knowledge and decrease friction.” Welcome to the show, Howard Lindzon.

Howard: Meb, how are you?

Meb: I’m doing great. I’m here out on the left coast where you normally often call home. But we got you in New York right now, is that right?

Howard: Yeah, I’m doing a 90-day empty nest celebration with my wife in Manhattan.

Meb: It’s awesome. I love the city. We cross paths there at the Ritholtz Conference and may cross paths here again in a week or so. How long are you gonna be there, through year end?

Howard: Through year end. Coronado’s our home in San Diego, so it’s coast-to-coast living. And kids are off to college before they boomerang back into our house post-millennial college. So we’re just taking an advantage of it.

Meb: Congrats on the three to four year break before they move back in. Look, Howard, I’ve known you for a long time where we’ve had pizza many years ago in Arizona with some common friends. We’ve even invested together in a company. And so I know your very varied and interesting background, but most of our listeners are probably familiar with you, so why don’t you just give us, like, a super-fast two-minute overview so we can kind of get a little context for some of the topics we’re gonna be talking about so the listeners who aren’t familiar may get a better idea of where you’ve been and what you’ve been up to.

Howard: Okay, got it. Born in Toronto, so I have a conservative risk profile by DNA, I think. Moved to Arizona, love the desert, moved to Arizona for grad school, did my MBA, and then MIM at a school called Thunderbird which is now bankrupt, but was a great school, kind of owned by ASU now. And stayed in Arizona, got my green card, married, two kids, like I said, empty nesting. They’re off to college. Two dogs, got my start being a stockbroker, got into the market, loved it, then the market crashed in ’87, was kicked out of the business because of the market. Obviously, everybody was kicked out of the business. And went back to school living in the States. And in order to live in the States, you had to get sponsored, and that’s how I got back into stock brokerage business.

I just didn’t love it. And I was making cold calls. In one of my cold calls I discovered this company, you know, in cold calling, to get people back in the early ’90s, get people to invest, discovered this company, ended up investing in it, called Pro Innovative Concepts. It was a consumer stress fall [inaudible 00:03:41], and ended up going into the QVC Hall of Fame. It was like my first angel investment that turned into a kind of a pet rock. And so from there, I got the bug of angel investing, and now I’ve been doing that 20 years. We’ve invested in some billion-dollar companies, the latest one being Robinhood, which is fastest growing brokerage of all time here in the United States, and was also angel investor at LifeLock, which sold to Symantec for $2.4 billion.

But my passion still remained in stocks. In 2006, I started this company Wallstrip. The idea was to put CNBC on YouTube, and right place right time, we were the only people not making cat videos, I guess. And CBS acquired, we we’re the first show ever acquired by a major network on YouTube. And was working at CBS, working out my contract, kind of like Clarence Beeks, and Twitter came along. Fred Wilson was an investor in Twitter. I climbed aboard, started StockTwits to kind of create the Twitter for Finance. Eight years later, almost nine years later, now StockTwits is the largest social network for traders and prosumers [SP], I would guess you would say, institutions and CEOs kind of check their streams, the public company CEOs. So it’s really a popular, fun, lightweight, stock market app. And I run a fund, or third fund now. Social Leverage, we invest in early-stage software companies, a lot of them being financial services. So that’s kind of runs a gambit in four minutes probably of my life.

Meb: Perfect overview. I mean, there’s so much I wanna talk about today. We’re gonna have to fly through this. As a guy who does both public markets started out, but also private markets and kind of straddles the fence on both, I wanna talk about both today. But let’s start with public markets because most people are more familiar, a little easier. Give some listeners a little context. What’s your broad approach to the markets and investing, particularly the public side? How do you, and kind of how would you sum up the climate today?

Howard: Ooh, it took me a long time, right, like, at the beginning you’re just, you know, back in the early days of Blockbuster, Compaq computers, Bank of Boston, you know, ’91. And, you know, you sold what the guys put in front of you to the point where, today, you know, it’s a classic trend fall around the sunset. And, like, looking at things that are already doing well and then glodding [SP] onto them. It’s kind of like the pile of fish and the great white shark. Pretty simple picture in nature where you see a great white shark and you go, “I’m never gonna be the great white shark.” You’re gonna see the school of pile of fish swimming underneath. And you realise that that’s the easiest way for most people if they want to make money is to follow the great white shark. And so you want to get as close to the great white shark without actually getting eaten by the great white shark, and you can live a pretty good life.

So classic trend following in that perspective. Stocks in motion tend to stay in motion just like most objects. So it’s a really simple strategy. You can share this strategy all day long. Most people just, like, it’s crazy, but it works, you know. It’s not a perfect strategy and, you know, I like liquidity. I don’t like trying to understand the value of companies. I think there’s so many ways the markets are rigged that I think it’s best to just follow along the trends. And, well, not a low to highly volatile strategy, although the last three to four years, it hasn’t been, I expect, to get smacked, you know. At the end of trends, you just get smacked. And so this one’s gone on a lot longer than ever, but I’m just very pro-liquidity and being involved in markets and just catching big trends.

Meb: You know, it’s funny when you talk about trend following. Obviously our listeners are very familiar. That’s really my desert island sort of investment methodology. The funny thing is if you look around the investment landscape, you see almost no institutional investors or no individual investors that, to me, it’s the same strategy applied to different markets. Trend following and private investing or VC. And venture capital, in so many ways, you make a lot of bets. Some of them are the out size winners. It’s the same thing in trend following, where you have a lot of smaller losses and VC world is probably because they go to zero, but same thing in trend following where you have smaller losses but outsides gains. You just don’t see that many people or institutions that believe in both philosophies, which, to me, is the most natural aligned philosophy in the world. We’re gonna get back to that. We talked about private markets in general. But it’s interesting to have someone that thinks about both of them.

Howard: Well, let me just interrupt just to sort of get it off my chest. Like, same thing applies to private markets, right? The great white shark. The great white sharks in my business Marc Andreessen, Fred Wilson, you know, I use their names because they write and share so frequently. Marc Andreessen, not so much anymore on Twitter. But for a while there, it was just like having inside information. When you’re following great white sharks, and they’re giving away free information, and they have a history of being correct, and they are generally really adopters and smarter at technology and other things, they’re not talking about things they don’t know about, and you’re not fast following behind them, you’re insane. Like, there is no easier way to make money in my opinion than, you know, using your network. And this applies to private market.

So a perfect example is Bitcoin. You know, I travel a lot. I was an Israel investing, invested in this company called eToro in 2010. And I remember investing, and Yoni, the CEO, is like, “Howard, I know you’re gonna give me money, but I’m still bullish on Bitcoin.” And Bitcoin at that time was 12 cents. And I was like, “You’re insane. I’m making an investment in your company. Leave me alone. You want to buy Bitcoin, you buy Bitcoin.” And I don’t know, three years later, Fred Wilson on his blog wrote about his investment in Coinbase, and Bitcoin was now $200. You’re talking about something that went from 12 cents to $200. And that’s when I finally decided, okay, listen, if it’s early enough for Fred Wilson, you know…I didn’t need to be in the 12 cents. Fred Wilson is one of the great venture capitalists in the world. He’s publicly declaring a position of $200, which means he’s in this thing for seven to ten years. Yes, of course, there’s risk that it goes to zero.

And then the other end of the spectrum, we got Warren Buffett calling it, you know, fake, JP Morgan, Jamie Dimon calling it fake. There is a big trend between when Fred Wilson declares, “It’s time to put BC money to work,” and the time where Warren Buffett takes it seriously, or Jamie Dimon. So, to me, that’s trend following, right? Gone from 12 cents to $200. The hard part is putting that 12 cents, $200 behind you and going, Jesus, getting over the fact that you missed that first part of the market and then realizing, man, $200 to $8,000 has been a pretty good trend, and you still have Jamie Dimon saying, “This is a fraud.” You still have Warren Buffett making plenty of money not even dealing with Bitcoin. So I think trend following works in highly illiquid things as well as the most liquid things. And I think that’s my philosophy, and I’m gonna go to my grave trying to, you know, find alpha in those two sectors.

Meb: We’re very mentally aligned there. It’s often interesting to me that you talk to a lot of VCs, or you talk to a lot of the old-school managed futures or trend followers, and it just doesn’t seem to be that much overlap, where most of my friends that do manage futures or trend following aren’t also doing private equity or that much investing, and vice versa. Anyway, topic of another podcast because there’s a lot I wanna talk about.

All right. One of the things you talk about, you talk about young people investing, you’ve done a lot on various FinTech angel investing apps, but also talking about educating people in general. You talked about, and this is kind of some similar themes of what we just talked about already. But you said, you had a post where you were talking about how to get invested, kind of advice for younger people you said, “One, open a brokerage account, start a journal. Two, lose money on a trade. Three, get a mentor.” I was wondering kind of, you know, maybe talk a little bit about that. And then also talk a little bit about kind of how you’re thinking about, you know, the younger crowd today. Because, obviously, as an early investor in Robinhood and other companies, it’s a bit different world for the younger folks, or maybe not. So why don’t I give you that platform and kind of give me any thoughts you have on that in general?

Howard: I mean, my early inspiration, everybody needs mentors, right? You might pay it forward as to make sure I share as much openly as possible. I’m not a terrible person. I’m not gonna have the type of fortune to hand off to the next generation. At least, at my age, today, I didn’t I say that Warren Buffett made most of his money after he turned 50 so who knows. But I love to write. And I’m inspired by people who have shared with me. And I get inspiration to people, you know, a lot of people read my daily blog and streams and give me feedback that I’m helping them. And that’s kind of the high that I get from sharing.

I think what people don’t understand is, you know, we look at, “This next generation, what a bunch of knuckleheads.” And every generation says that about the generation that’s coming up behind them. But as we’re learning with this group of avocado-eating millennials, they’re no different than us. They wanna get rich quick. They just have different vehicles for doing that. They’re going to blow themselves up. Can’t stop them. You can help to help them. But they’re all gonna learn in their own process. Hopefully they’ll learn a lot quicker.

So my thesis, as a private investor was, you know, I grew up watching Jim Cramer come on do street.com. And then, you know, CNBC’s days. And then, we’re just trying to use different tools to do the same thing, you know. All this market information is rehashing it a thousand times. I don’t think there’s anything wrong with that, you know. Yoga’s been around forever. It’s the same mantra over and over and over. They don’t change the mantra. Yoga is yoga, and stock market is stock market, because human behaviour is human behaviour. So, you know, kind of like a wet blanket for people to learn the markets. And that’s what stock tips is, that’s what journaling does. And I think we have to give this next generation tools so they can, you know, cut themselves and make money of themselves.

Of course, I don’t think anybody but a few, you know, handful of people predicted that Bitcoin would be that vehicle that got so many people excited. Bitcoin is like farming, you know. Back in the ’70s, if you were a car salesman, you were told, “Listen, don’t judge a person that walks into the dealership because they look like a farmer. That farmer may be the rich person.” And I think today is, like, “Don’t judge this 18-year-old kid from Venezuela because he doesn’t look rich. He could have been a Bitcoin miner or made a fortune in Bitcoin.” So every generation has this vehicle. I think crypto, while being mocked, is making a lot of people rich around the world. It’s just much different than the last vehicle that people got to get rich.

And so with Robinhood, I was just basically saying, “There’s gonna be an E-Trade of this next generation. This $8, this last mile of commissions of Schwab, TD, Ameritrade, the rest of these broker charge, really are just marketing cost, right? If they cut their advertising budgets, fired all their marketing people, cut out their tea budgets, they, too, could go to zero commission. But, you know, these companies are set up that no one wants to lose their job. And so along comes Robinhood better technology, very simple value crop, which is, you know, people don’t care so much about nickels and dimes on these spreads, but they just don’t want to pay commission. They wanna pick up their phone, they wanna have an Uber of trading. And that’s, you know, that little thing, that little hack is what helped them become the fastest-growing brokers. Obviously they’ve executed very well and they have a lot of beautiful design, but, you know, they have 80 to 100 people, and they have more accounts than E-Trade has. Think about how many call centres E-Trade has to have to manage their clientele.”

So that’s the exciting part, is just having a simple hypothesis that you can express through investing in engineers and have an impact on the world. So that’s the stuff that makes me the angel investor excited, is that, wow, you know, here I am in Phoenix and San Diego and are able to make investments that have that huge an impact. And so that is why, you know, to judge this next generation and say, “They don’t want to invest,” is crazy. They wanna buy homes. They just don’t wanna do, they don’t want their mortgage to be something they don’t understand. They just wanna understand the product and they wanna be able to make their payments without talking to anybody, and they wanna have no friction. And you can’t market to them. When they’re ready to do something, they wanna click two buttons and they wanna get it done.

Meb: You know, so listeners, by the way, Robinhood is a app brokerage that charges no commission. And Howard, I don’t know if you saw, there was an amazing ad in “Barron’s” about six months ago where they do these commission’s comparisons. And so it was E-Trade comparing against TD and Schwab and all the rest. I think it’s a Schwab commercial and says, “Hey, look, we’re lower than all the rest.” And about a page or two later in “Barron’s,” you had to interact to brokers, and they just added one more column to the table. They said, “Well, yeah, you’re the only lowest because you didn’t include us on the table. We’re actually lower than you.” I think it’d be funny for Robinhood trolled all of them and just have an ad, I know you said they don’t do any advertising, and I just add one more column to the table would be like, “What are you guys talking about? We don’t charge anything.” Anyway, kind of funny.

Howard: Well, the troll is really on them because no one reads these things anyways. I don’t know how they’re marketing to because the next generation, looking at their friends phone going, “Why did you just do that? You just bought one share of Apple with no commission. What app is that?” And that is what’s called viral, you know, marketing, viral coefficients, which made Uber so great, and Snapchat so big, and Instagram so big. It’s friends looking over the shoulder of other friends. And that is a phenomenon, you know, E-Trade, Schwab, don’t want to deal with. And that’s what allows an incumbent to let something like Robinhood sneak up.

Now what makes this stuff so fascinating is, you know, I’m sure there was meetings early on like, “Hey, we need a zero, you know, Robinhood…I mean, Schwab.” Probably had meetings in TD Ameritrade, like, “Hey, guys, like, we probably need a zero-commission offering.” And, you know, these older incumbents, they don’t even want a millennial customer. For them to spend $300, $400 to acquire a customer, they may only have $200 in their account, I can understand, you know, corporate saying, “Let’s not worry about it. The problems that they have long-term is that Robinhood is, in my mind, the cost of customer acquisition. So while everybody’s thinking about how’s Robinhood going to make money? Basically, what they’ve done is where TD Ameritrade used to spend $300 million, $400 million here to acquire 100,000 customers, Robinhood does for zero. And so theoretically, every 100,000 customers that Robinhood signs up and gets trading and gets investing is worth $300 million, $400 million long-term. If you wanna cut that down by two-thirds, it’s worth $100 million. And that’s why Robinhood has $1 billion valuation. Not because it’s worth $1 billion dollars today, but that they’d hacked the customer acquisition and built a larger customer base in two years than E-Trade did with, you know, billion dollars of marketing. That’s the hack.

Meb: Before we go down that rabbit hole, you know, for the younger people listening, and this probably applies to anyone as well, you know, as you’re talking about getting involved in markets and learning and things to trade, there’s a great website that lets you, it’s actually a terribly designed website, but it’s the only one I know of that lets you sort people’s tweets by most popular. And one of your top five tweets said, “There’s no such thing as information overload, only filter failure.” And I think this applies…and I’m gonna ask for your suggestion, you know, a lot of people that are trying to find more information about investing, and one of your suggestions was find a mentor, like, what would you tell all these people? Because I think this is a big gaping hole in FinTech and investing just in general where, you know, a lot of people that they don’t know where to get started, there is no, in my mind, Rosetta Stone for investing. So what’s your advice to people that want to start to learn? Is it just to immerse yourself, is it to start to follow some of the top names? Like, what do you suggest for this, just, avalanche of information on how to kind of parse it as well as find the best ways to learn?

Howard: It’s a great question. It’s the ultimate question, right? Because when we started, the cool people had eight screens. The cool people had kind of global thermonuclear arsenal of tools to help them find stocks. But like I said earlier, it’s, like, I just wanna fast follow people that already have a history of being correct. And so what we, right or wrong, there’s this phenomenon that people are sharing ideas. That was the first phenomenon that institutions laughed at. It was like, wait a minute, nobody good is ever gonna share an idea for free on the open internet. So that was the first big miscalculation by Wall Street.

Now they’ve been lucky at many stages. We could go on and on for hours about Twitter, how they screwed up and let, you know, setback the industry 10 years, you know, they have been so much more disruptive to the financial industry. But the main hypothesis was, I believed, and Fred Wilson believed when we saw Twitter and we saw StockTwits. So people were gonna, to share ideas, right? Like, for me, it’s just getting shit off my chest. Like, take my idea or not. I don’t wanna, you know, the old model was Jim Cramer, somebody coming on TV pounding the table and saying, “Buy this. Buy that.” And that’s the old model. That’s the Yahoo model. The Google model is “Hey, people come in, get information, and send them away.” If you’re good, if you have a good enough product, people will come back. And so to us, the idea is, there’s enough smart people sharing ideas. And we see it every day on Twitter in StockTwits.

And that is, you know, don’t be so cynical. Find people that have a history of consistently sharing ideas. Spend enough time paying for mentorship in the financial world to find someone that suits your style, that understand your risk profile behaviour. Find some people that will mentor you. It doesn’t matter how expensive that is because over the course of your investment career, it’s cheap. And then test, you know, with products like Robinhood, if you want to test trading stocks, great. If you want to test angel investing, there are sites like AngelList where you can go deploy, you know, $20,000 across 20 companies, $1,000 apiece, and be invested in private companies. But you can’t really learn until you take that first step. You really don’t know how you’re gonna be as an investor until you actually lose money. You know, when you make money, your emotions will play tricks on you. When you lose money, your emotions are gonna be more real. And so until you start losing money, and that’s why I say, like, start early because you’re eventually gonna lose money, and that’s how you kind of feel your strategy is gonna be.

But I think you have to find mentors. If they’re free, just be nice to them. If you find people, like, on Twitter and StockTwits or, you know, blogs that have great ideas, say “Hello,” say, “Thank you,” you know. Show some social etiquette. These are people that are giving ideas away for free. And then, you know, communicate with them. Tell them you appreciate the, you know, the mentoring. But it’s just some social etiquette. But there’s so many people sharing for free that you probably almost don’t have to pay for mentorship. But at the same time, the less is more. So there’s just so much information out there that you really have to find, 3 or 4, you know, sometimes as much as 10 people.

And then, you know, don’t continually read outside that box. When you’re in investing, find those 10 people that are consistent at sharing ideas and have really good philosophies and a track record of success, and then just follow along. You don’t have to read everything.

Meb: So, for you, in the early days, it was Brad Feld, it was Fred Wilson, are there any other names off top of your head that you think are particularly useful and, you know, you would suggest listeners, if they’re not that familiar, maybe to take a look at?

Howard: Yeah. So on StockTwits, there’s thousands. But for myself, I am a trend follower, so, yes. I read “Early Stage Benture Capitalist.” So, Brad Feld, Fred Wilson, obviously, Marc Andreessen used to share a lot of stuff on Twitter, and Chris Dickson. So, really on the early stage stuff, a lot of these guys have gone quiet, but Fred Wilson has a blog. He shares every day. Brad Feld writes every day. But if you can really track how the best investors, seed investors, and private investors in the world are investing, glob onto them.

On the public side, it depends what your risk profile is. For me, as a momentum trader, I have a kid who works for me, Ivan HOF, if you follow me on StockTwits, which is really easy to do, and hit me up on [email protected], I can send you 30 or 40 names. And then I’ve written so many posts that I’ll have to share with you, Meb, that, you know, how to get started on StockTwits and how to find trend followers, how to find value investors, how to find, you know, day traders or scalpers, how to find different types of traders. And there’s so many different styles to do this. And so the key is to be true to one style yourself. You can’t have ten different styles. So I like to follow swing traders and momentum traders myself. I don’t wanna learn…I’m an old dog, so I don’t wanna learn new tricks, so I tend to follow people that just look for swing trades and long-term trend following. So, again, I have a different profile than anybody. But it’s easy to find me on StockTwits and I’ll share names.

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Meb: I wanna be able to transition a little bit into the sort of private world, because you’ve mentioned a lot of the mentors and people you follow on kind of that part of the aisle. And there’s a couple topics that, one, you know, I think a broad overview on kind of this blurring of the lines between public and private. I mean, the last 10 years, we’ve seen a lot of companies choosing not to go the IPO route. So you have these, a lot of these late stage private companies. And then, you know, this development of this early stage accessible seed stage venture capital world to, you know, individuals as well as funds as well. So maybe just give you an open mic and kind of talk a little bit about your thoughts there, and then we’ll dive into some specifics as we go along.

Howard: Yeah, the whole thing changed I think in 2007, 2008. So private markets were private markets. We all got crushed if you’re old enough and, you know, nobody rang a bell March 2000. It was a giant party. And, you know, back to VCs weren’t blogging, and everything was in the public markets, right? It was a different type of world, the venture capital world, right? And starting companies was really expensive, right? Pre-cloud, you know, in that server world, we had to see and buy every…all those for yourself. So it was a Sun, Microsystems, Cisco world where really it was fake sales in the sense that all these companies had VC money and they were, they couldn’t afford to pay for all this equipment. So that’s why the first crash happened. And it was devastating. It took seven, eight years for people to get the nerve to invest in start-ups again.

But then the cloud came along and that changed everything. So what happened with the cloud is, you know, just like everything disappeared into the sky, meaning you could start companies cheaper and cheaper and cheaper. And so with that has, you know, come a sea change, and, you know, the end of this financial leverage era of 2007 where the financial leverage is a great tactic. But it became just an overriding strategy in the market. So you have the financial crisis.

And coming out of this financial crisis does this start-up revolution. And this start-up revolution, you know, you had a combination of a cloud and a combination of people not trusting institutions, and yet a combination of all this money looking still for a place to go with the spigots being opened by the Fed. And so this phenomenon, plus you had YouTube, Facebook, Twitter at the exact same time, which meant free distribution. So not only did everything was going in your favour if you started a company coming out of the crisis, because they had YouTube, like I said, Facebook, looking for traffic, looking for content, and you had all these great ideas and entrepreneurs and cash looking for a place to go share. You had all these start-ups, you had all these products, you had all these distribution, but you had this massive boom that we’re still feeling the effects of today. And so it’s just kind of been like shooting fish in a barrel.

Along with that comes more money. And, you know, since the Fed, and it’s not stopped printing money, and now we have a global social mobile world. You have all this money from all over the world whipping across borders, and you have all this talent leaving large companies, you know, from GE on down to IBM and Intel, starting companies, and you have all this infrastructure that has to get built and remade, all these roads. And so we have this continued boom. And what happened was people don’t wanna go public, right? They have bad memories of going public. And they didn’t have to go public. A lot of these founders were like, said, “Listen, you guys don’t need to go public. There’s all this money at the late stage fidelity T. Rowe Price, Warburg Pincus, who will give you $100 million, $200 million dollars and treat you like you are a public company in a sense.

So now you’re starting to see the effects of it going on too long. It isn’t healthy to have everything as a private company. And so you have this kind of bifurcation where, you know, you have the Uber which is too big to stay private and maybe too big to do a regular IPO. So now we’re in this transition phase, and it’d be interesting how this plays out because I miss people trading in the public markets. But because there’s been so much change in terms of how the capital markets are working and how much cash is available to start-ups and mid-tier companies, it’s really hard to say, you know, how this all plays out. But in the meantime there’s just so much liquidity in the private markets for good entrepreneurs and good founders, that if you don’t have to go public, who can blame somebody for staying private? And now you have a lot of these great VCs that were, like, scarred by the bubble in 2000 actually now screaming for some of these private companies to get public. So it’s kind of like a crossover at this point.

So I’ve shared a lot there, but the key point is that there’s this melding of public and private markets. And because of technology, you have people like me able to invest in both public and private markets to express themselves. And by that, I mean I’m very bullish on financials both…not just at the early stage like Robinhood, but also Goldman Sachs, because Goldman Sachs has survived. And, you know, love them or hate them, they’re bigger and stronger than ever and leaner and smarter than ever, and so they’re gonna be harder to displace than ever. So this barbell approach of like investing in start-ups but also investing in the legacy companies that are stronger than ever like Goldman Sachs is working.

Meb: You had a great quote in a piece you wrote called “The Future of Asset Management” talking about Goldman, and is about, talking about the future and automation, and I’ll read it. It says, “Goldman won’t have many humans left in the next 10 years. They replace people with algos and machines. That will make them the most human and caring they have ever been.” I love it. But it’s funny to think about, I recently rented a car, which is, to me, still unfathomably the worst customer experience you could possibly go through. And one of the car rental agencies had kiosks that had people, there were a video screen, you know, that we’re manning it from who knows where, but it actually ended up being kind of a nice experience compared to the shit show that it normally is. So we touched on a lot there.

The part that I wanna talk about is sort of this spectrum of public private now. And it’s kind of just, you know, it’s been blurred. And for someone, you know, like yourself, who’s been an entrepreneur on private companies, who’s been an investor, who’s done everything in between, let’s talk a little bit about, you know, kind of how you think about that world and if individuals can kind of access it. And so we’ve had a few different angel and VC investors on the show. And it’s interesting to get their advice because people have different takeaways. You know, one suggested it was easy to get in as an individual and it wasn’t that hard. Could you syndicates on that stuff. Another suggested it was much more challenging and said, “You should probably, you know, only think about investing through funds and gatekeepers.” Kind of what’s your perspective advice on that world and how people can think about it if they wanted to get exposure?

Howard: Awesome. I’ve slipped on this, like, I was so for people blowing their brains out. And, you know, if they think they built a smart enough network and they have a feel for a founder or a private company, they should definitely roll the dice. I do think, though…so I still believe that I just feel like, in hindsight, I definitely have been…Listen, I’ve taken my chances and I’ve had a lot of losses, but I definitely have had some big wins. And in analysing the big wins, you know, the losses are the losses, they’re horrifying, investing in private companies and having stocks crash on you. But private companies, it’s easy to learn from the mistakes, no doubt.

But in looking back at my big wins, I feel like, you know, there is a lot of luck there. It’s not because I’m smart. If you look at, like, there’s this area coming out of the crash of 2008, you had, like I mentioned earlier, you had this perfect storm. The cloud, you had all this money is still looking for a home, and all these, you know, under these cheap companies being started by great founders, and you had this massive distribution on Facebook, Twitter, YouTube all craving content and exploding in terms of distribution. So it’s kind of a perfect storm for start-ups. So I’m a little…It is just the right time. You almost could have invested in anything. If you’ve invested in any 10 companies coming out of ’08, ’09, you would have been considered a great angel investor. And so I caught a lot of them.

I think 2010 to 2014 was very different, right? You have Uber and Airbnb in that age, and you have AngelList, which is kind of like a private, like a social network for angel investing. But beyond that, that was a tough era because that was the era of Google Glass, that was the era of Amazon really laying down the gauntlet and crushing retail. And so if you’d started angel investing in 2010, it was a pretty much a dry desert. And so I think you kind of got to get lucky. Like, private investment is like wine. If you’re just gonna say, “I’m doing it for one year. I’m gonna put, you know, $200,000 that worth $20,000 in 10 companies, you better get lucky in terms of the platforms that are surrounding the world and growing. And I say this because 2010 to 2014, there was a lot of Google Glass funds. There was a lot of funds dedicated investing on top of Google Glass, and those are all zeroes, right? There’s not, like, one winner. They’re all zeros.

And then if you invested in the crypto trend in 2014 on, boy, you’re now looking like a genius because the crypto trend, it doesn’t matter what you did. Because Bitcoin is gone from $200 to $8,000, so everybody looks like a genius. So a lot of this is like crops. I think to be a great angel investor, you’ve got to really invest over three, four, you know, generations of text. You got to be doing it for about 20 years. You can’t time it. That would be just like timing the stock market.

So I think angel investing is much harder than public market investing because it takes that much longer to see a crop work. And you can be rewarded much quicker in the public markets. So they really are very different, you know, in hindsight. And I think to be a good angel investor, you really have to have enough capital to do 50 to 100 companies. And that’s gonna take 5 to 10 years of investing, and that’s how you’re gonna have the best returns. Sure, you can get lucky. There’s people that do it. There’s people that have incredible vision for picking the right founder and, you know, cherry picking one or two private companies, but I think that’s just…I wouldn’t recommend people try and do that.

Meb: And I think the comments about, you know, various vintages, I mean, if you look at even Yale and a lot of these endowments that have had massive success with private market investing through both private equity IPOs as well as venture capital, you know, it often is, in many cases, sort of vintage-dependent. And you have these massive winners. Now it’s just hard to predict, too, because you could have the big winners in years that are late in the cycle, like it feels, like, we’re pretty late, you know. And it is part the cycle. But I love your idea of committing. And so, you know, the listeners have kind of tagged along with my personal journey. I started doing this about three, four years ago, very small, very spread out over time, and kind of paying my tuition thinking about it. Howard, one of the deals we did together was so far my only exit, and it was positive, so kudos to you. I owe you a lunch at some point.

Howard: But the lesson is you have to continue to do it. When you’re angel investing, when you’re competing against the S&P, and again, I don’t like competing against S&P because I don’t think 12% annualised is worth, you know, you might as well… If you’re trying to make 10% a year, you might as well index, you know, take the volatility index, but I don’t think investing is, for 10% a year. I’m trying to make 50% to 100% a year, but I also understand that I’m gonna have big, you know, I’m gonna have two, three year pairs where it’s just punishing. And the point being that one winner defines your portfolio. I mean, people could… It really comes down to the, you know, we joke about the unicorn thing, and it’s nice that, you know, you had your exit. But really, the game doesn’t really matter until you have that outlier of that.

And that’s why public markets and private markets are different. The public markets are fun because I could check my prices every day, and I trade highly liquid stocks, and I can change my mind. But in the private market, you can’t change your mind, right? You’re in. You really don’t wanna pyramid into losers. And you have to have enough money to pyramid into winners. So that’s a whole another story. It was like having enough money to follow on and keep your share of a company. But really, angel investing is defined by outliers. It’s having a Lifelock, that’s having a Robinhood.

And I won’t lie. Now that I’ve seen this, the great investors tell you that, like, the portfolio is decided by one or two companies. You’re gonna have a lot of zeros so you need that 100-bagger. The odds of, you know, you cherry picking one, 100-bagger and the one Twitter, or the one Facebook is just too low because you probably won’t have the access. And if shown Facebook early, you would have laughed at the original vision, you know. So I think the portfolio approach really is important around angel investing, and most people just don’t have the time or inclination to do it. So they’ve got to really find someone like me. And there’s hundreds of people like me now that take a portfolio approach, have a unique access to deal flow, have a unique thesis and best opinion, have domain experience, and then also have, you know, have spotted, it does help to say that you’ve spotted unicorns.

And you participated in these things. It’s no different than Dorothy when she discovers, you know, she peels back the curtain and, you know, the Wizard of Oz is just a regular person. Until you’ve seen the other side of that curtain, it’s really amazing when you, you know, we sold our company to CBS. When you’re in those negotiations, you realise that both sides don’t know what the hell they’re talking about. And it really helps to have seen the other side, you know, it’s like people that can cross into the end zone. There’s people that score touchdowns, and there’s people that, you know, are good between the 20-yard lines, but you have to find people that have seen the end zone. And the best way to see the end zone is to tag along with people that have seen the end zone before them, which is what you did with me, you know. We didn’t have a home run, but the longer you do with people that have seen home runs, the better chance you are to have home runs.

Meb: You know, that’s what I think it’s been so useful despite the cost on the Syndicates is you get to find and track a lot of good investors. You mentioned the outliers. I mean, that certainly applies to U.S. stocks or just stock market in general through market cap investing or trend following. Our friends at Longboard have published some great research that shows, you know, these outliers really help drive the returns of these indexes. Now it’s a lot easier to do it with public market investing because you can just buy a fund that buys the entire market, 500, 1,000, 2,000 stocks, and you’re guaranteed on the winners. It’s harder in private because they have massive portfolio that will guarantee you own the Uber and Facebook, means you have to be doing a lot of deals. So one of the ways to do that is simply through a fund. So I know you guys are raising a new fund. What’s the kind of themes or areas you guys are looking at for this new fund? Is it kind of more the same of your wheelhouse what you’ve been investing in, is it different? Tell us a little bit about it.

Howard: More of the same. You know, social leverage, our thesis was, you know, the network is the bank, right? What makes Bitcoin gold is not because it’s physical or whatever. It’s the network, right? Bitcoin is now kind of the next generation’s gold. It’ll be volatile. It may drop to $2000. But the point is the network is what makes it gold. The fact that everybody is talking about it gives it its value.

And then, so what we’re looking for is just the next Robinhood, meaning we’ve seen that this next generation wants to invest, you know. What’s interesting is it’s not just going to be Bitcoin, you know. We looked at a company that we recently invested in called Rally Rd. which is doing fractional ownership of collector cars. So there’s an industry, collector cars for example, that Barrett Jackson, you know, 400,000 people salute them on Phoenix every year. It’s like Super Bowl to watch, you know, 300 dudes buy $500,000 cars. And then there’s millions of people on websites watching them do that. Well, how about flipping that model and giving access to the fans? The people that really wanna own these cars can have fractional ownership of these cars. So instead of the richest guy being able to buy a $500,000 car, how about doing an IPO and having somebody smart buy that car, take it public, and allow the investors to own a piece of that car?

And so giving someone access to an asset class that, you know, if you’re not accredited and being able to have 100 cars in your portfolio, if you’re a car buff and have $200 across 50 cars or $10,000 invested in an asset class, that’s interesting to us. And so there’ll be many more Robinhood’s out there that’ll look and feel like Robinhood but do it around different asset classes. So we are we, you know, we invest 500 to 1,000,000 per company across 20 to 25 companies per portfolio. My focus is financial services. My partner is very much into SaaS. He worked at Salesforce for four years after selling his company. And I think there’s huge intersection of customer support and tech as well.

So for example, Schwab, Fidelity, TD Ameritrade, those companies had to build a different type of customer support, you know. They would spin up call centres with thousands of registered call…you know, people taking phone calls to answer questions. Well, in the Robinhood world, they don’t have time to spin up a call centre. They already have 3 million customers. They need a product like Zendesk, which is a public company, but there’s also gonna be 100 competitors in this space taking chips away at Zendesk to supply customer support for FinTech companies. So customer support is a huge area that I’m focused on, you know, companies that are taking on Amazon, little niches. Not only do they have to supply the best website and the best products, but they also got to have Amazon-level customer support from day one or they’re never going to get traction. So software that helps people compete or small companies compete at a level of support that is Amazon, and then financial service companies to fast follow in the Robinhood and Acorn and these last few years, unicorns of financial companies is what intrigues us.

Meb: Interesting. I love it. We’re gonna have to let you go here in a second. Two more really fast questions. You know, you’ve written a ton of content blog, books. I see you also have a research piece called “Peloton.” Can you tell us a little bit about that real quick?

Howard: Yeah, I was approached. And I love to write. I’ve never really charged for my work. But I was approached by the Agora people at Charles Research and they said, “Listen, why don’t we do…you know, you have all these trend ideas, why don’t we just make it really simple for people, you know, one idea a month, you know, do a little bit longer discussion about how you’re thinking about the idea.” This is like the Zendesk for example. “It’s like you have this thesis around customer support and there’s really only one public company to do that.” And, you know, this comes into my trend following strategy. It’s like, you know, Zendesk is this gonna be parentally overvalued because it’s the only way that institutions can play this customer support thing outside of Amazon. So I’m long Zendesk, not so much worried about the market cap. I’m more worried about Zendesk has so much ground to cover. But even if they don’t have an inferior product, they’re gonna have so much market to take.

And the fact is that there’s many ways to play this trend. In the private market, that’s what, you know, we invest in. But in the public market, there’s Zendesk. So they came to me and said, “Why don’t we express this Zendesk story in a way that helps people understand why hedge funds are chasing this stock and why the stock continues to go up or may continue to go up.” So “Peloton” is more me free-forming on why trends are persisting and how to capitalise on those trends. So I try and come up with, you know, one idea a month in a really long-form way. And, of course, I can change my mind. But, you know, the first idea was Zendesk. It’s up 30%.

My recent idea was Noah, which is a wealth management company out of China. It’s kind of like the Charles Schwab of China, growing really fast. And again, you know, my thesis is I’m long start-ups. But Noah, which is a company that very few people follow, N-O-A-H, was a way to express in a public market how this trend of millennials investing in Asia and Eastern Southeast Asia are going to invest. And again, you know, fundamentals aside, as long as the company is doing everything that I want it to do and growing along those lines, it’s gonna be a big winner. The stocks up like 40% in the last six months. So we try and find big ideas across big trends, and that’s what “Peloton” is about.

Meb: There’s definitely gonna be a listener somewhere that’s gonna inadvertently by Noah Bagels on the stock exchange trying to buy that…

Howard: No, no. This stocks had a great run, but these are…I’m trying to find these ideas as they break out, I’m trying to explain them to people in English. And that takes more than just a tweet in a blog post. So that’s kind of what “Peloton” is about.

Meb: I like it, Howard. We got one more question. I’m sad we have a hard stop because there’s like two more hours of material. This is a question we ask everyone in 2017. If you look back, go back in time over the last couple decades, what has been the most memorable trade or investment that you’ve experienced? It could be good. It could be bad. Just the one that’s seared most into your brain over the past 20, 30 years. I think Howard just had a heart attack and gave up. You still there?

Howard: Oh, sorry. I was gonna say… I was on mute there. The softball question, I love it. But the…

Meb: It was not a softball because for a lot of people, it costs them a lot of angst.

Howard: Oh, it’s all angst. Listen, I mean, if anybody says it’s not stressful, of course, I’m having the time of my life, and it’s extremely stressful every day because, you know, performance anxiety exists. You’re working for somebody. I work for my LPs. I take it seriously. You know, I’m supposed to be founder-friendly. But at the same time, I have a responsibility to get returns and a fiduciary responsibility to return money. That is no joke. And I think that’s not… I think it’s not taken seriously enough at the board level at public companies and at the angel investor level, you know, other people in my industry. So we take that dead serious.

I think the truth of it is it’s not the winners. I mean, we’ve been doing this long enough. I’ve had home runs and they’re exciting. But it’s the ones that I miss that stand out the most, you know. It’s seeing Zynga to, you know, knowing Mark Pinkus and seeing this pitch and liking it and disagreeing about the price and not investing, you know. So it’s a ones where I like was in the batter’s box, saw the fat pitch, you know, you should have swung, and didn’t. So those are the ones that stand out. To me, it’s Twitter and Zynga. The ones that are most exciting, though, are the ones like LifeLock where, you know, you’re the pitch, you know. We’re in the middle of nowhere in Phoenix and Tempe, Arizona. I get the pitch and I go, “This is genius.” When you write that check, then chaos ensues, but in the end, you make a lot of money.

Same thing with Robinhood, you know. We wrote an early check. People said we were crazy, you know. The venture capitalists were all about Robo and disrupting Vanguard, and zero commission, how dumb. And, you know, three years later I have, you know, a billion-dollar, you know, brand, and liquidity if you wanted to sell some is, you know, the satisfaction. But, you know, that’s my job to have success. I think the ones that have drive the most angst are, “I can’t believe, you know, I passed on Twitter, the $20 million valuation in 2008 because I thought it was overvalued. You know, that’s the ridiculousness of the job is, like, calling Twitter overvalued at $20 million.

Meb: Howard, it’s been a blast. We got to let you go to go see “Hamilton” or “Phantom of the Opera” or enjoy the New York nightlife. Where can people find more info? They wanna track you. Where’s the best spot?

Howard: I think the best spot is my blog, howardlindzon.com. I write daily. Sign up for my every morning 7:00 a.m., there’s an email. And my wife’s yelling at me to say where they can find me. What, honey? Oh, and obviously my…it’s easy to sign up for “Peloton,” which is a monthly service. So if you don’t want to hear me every day and you just want my, you know, my big theme idea of the month, I think it’s like $80 a year. So it’s dead cheap, but at least, you know, helps me pay copywriters and stuff to get the ideas clear. But every morning if you go to my blog howardlindzon.com, you get, you know, three paragraph, you know, trend idea, or something that’s good, something I’m thinking about.

And then, on StockTwits, you know, sign up for StockTwits. It’s an amazing app. Build a watch list, you know, chime in, mentor, journal, share your ideas, you know. It sounds silly but it’s really cathartic, and it’s really good for investing to share your ideas.

Meb: Howard, it’s been fun as always. Thanks for taking the time today.

Howard: Thanks, Meb.

Meb: Have a great evening. And listeners, thanks for taking the time to listen. We always welcome feedback at [email protected] Find the show notes. We’ll post all these to [email protected]/podcast, links, everything else. You can subscribe to show on iTunes. Blah, blah, blah. If you’re enjoying it, please leave a review. Thanks for listening, friends, and good investing.

 

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