Episode #151: Divya Narendra, “Valuation Is Probably The Most Critical Component Of SumZero’s Thesis”
Guest: Before founding SumZero, Divya was an Associate at Sowood Capital Management, a $3.5B multi-strat hedge fund located in Boston, MA. At Sowood, Divya analyzed investment opportunities across the capital structure. Prior to this, he was an analyst in the M&A Group at Credit Suisse in NYC. Divya graduated from Harvard College in 2004 with a degree in Applied Mathematics and earned a JD/MBA from Northwestern University.
Date Recorded: 4/10/19
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Summary: In episode 151 we welcome Divya Narendra, CEO & Co-Founder of SumZero. Divya begins by talking about the beginnings of SumZero and finding its initial traction by Divya calling friends from other funds and politely asking them to submit research. From there, he asked those friends to provide any contacts they could, and the platform grew from there, including a cap-intro side of the business to expose analysts, PMs, and fund managers to potential investors.
Divya then discusses addressing the shortcomings of sell side research with SumZero, in particular, the lack of vested interest and high conviction from the sell-side, and lack of coverage in unknown securities. All contributors are vetted, and their ideas go through Divya.
Meb asks about how people use the site for generating ideas, which brings up some various processes like screens from people with a fundamental approach, to quants who are looking at items like who is getting the most views and best ratings. Divya even gets into some of the best ideas contests he has run, and even submitted a contest winner’s idea to Warren Buffett.
The conversation then shifts to what Divya sees in the future for SumZero, from scaling cap-intro efforts, to a data feed that can serve quantitatively driven analysts, but ultimately looks to expand the scope of the SumZero community.
Catch all this and more in episode 151, including Divya’s thoughts about the future of fundamental stock picking, robo advisors and the private wealth model, and more.
Links from the Episode:
- 0:50 – Introduction and welcome to Divya Narendra
- 1:51 – The formation of SumZero
- 4:04 – Convincing people to join the platform
- 8:35 – Sell side vs buy side research
- 13:29 – How quality control is handled on SumZero
- 17:05 – Analysts that blossomed via SumZero
- 19:36 – Finding job opportunities through the site
- 22:19 – Episode 4 – Wes Gray – “Even God Would Get Fired as an Active Investor”
- 22:31 – Using SumZero for idea generation
- 24:37 – The Warren Buffett challenge
- 26:25 – Crypto research
- 28:44 – The future of stock picking
- 31:51 – Focusing on a subscription based SaaS business vs. running a fund
- 33:26 – Private markets and the platform
- 36:14 – Robo advisors
- 41:06 – What has Divya excited for the future and discourse via technology
- 43:03 – How to Configure Your iPhone to Work for You, Not Against You
- 45:37 – Collaborating with humans
- 49:51 – Most memorable investment, Divya’s concept of Harvard Connection that was later launched as Facebook by Mark Zuckerberg
- 56:47 – Connect with Divya: sumzero.com, LinkedIn, Facebook, @divyanarendra, @SumZero
Transcript of Episode 151:
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 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. It is April the 10th. And if I have a hoarse voice, it is because my Virginia Cavaliers are now national basketball champions. Honestly, my nerves are fried. I don’t think I could take any more games like the last three. But it was great to spend some time in Minneapolis, beautiful city. I got to pass a live turkey walking past me on the sidewalk. Other than that, great people, great time. But we have a great show for you today.
Our guest is the CEO and co-founder of SumZero, a community of investment pros. It fosters a sharing of thousands of ideas and reports. Membership base represented by analysts and PMs and nearly all the world’s top hedge funds and prominent funds. Prior to SumZero, I’ll sneak this in the bio, along with some pretty famous twins started the precursor to Facebook also spent time at Credit Suisse, Sowood Capital. Welcome to the show, Divya Narendra.
Divya: Thanks for having me, Meb.
Meb: Divya, I’ve known you a while at least virtually going back, man, probably a decade. And have really watched your progress with SumZero, which I love, by the way. We’ll just say that ahead of time to get my bias out of the way. For those who are listening who have never heard of SumZero, talk to me a little bit about the genesis idea. I know you started it at the fortuitous time of right before the financial crisis or maybe during, I can’t remember.
Divya: So after college, I worked in New York for a couple years in banking, and then moved to Boston to work at a hedge fund that managed money for the Harvard University endowment. And about one year into my job, the credit crisis, which predated the stock market crash of 2008 by about 6 months kind of happened. And the guy who ran the fund I was working at just decided to shut the whole shop down. And potentially, everyone kind of went off to do other things. Most of them just went to other funds.
At the time, I was kind of thinking about my own career, what I wanted to do. I wasn’t entirely sure. As you’ve mentioned, I had my sort of brush with social media and web 2.0 while I was in undergrad building out our reconnection and realized that there was really no online platform to connect investment professionals. I noticed when I was working at Sowood Capital that my boss would more often than not call his other PM friends and other funds to gain investment insights. And wouldn’t rely heavily on traditional sell-side research from Wall Street.
You know, I just realized that there was a limit to his own personal network and that that need to connect with other peers in your industry could be dealt with much more efficiently online. And that sort of became, I think, the basis of what SumZero is today, where we have approximately 16,000 members globally. And I should say, the site at a very, very high level is almost like if you took LinkedIn and targeted it towards investment professionals and sort of mashed it with Wikipedia, you know, which sort of represents our idea database, you’d get SumZero. And it’s sort of both the social network for the buy side but also a global repository of detailed investment ideas.
Meb: You know, it’s funny because so many people in institutions and companies have tried to circle around this concept and this idea. And I feel like there’s a lot of permutations of it, some of which are successful, you know, the famous Ira Sohn charity event. You know, some of the big managers would pitch their ideas. And there’s actually been quite a bit of academic research, and I’m sure we’ll talk about this as we go forward, that supports this concept of these networks of legit investors.
And it’s funny if you go back far enough to the ’90s…I was actually just talking about this with some friends in Canada, no one remembered it, but there was a company trying to do it, but with the vast public at large, Marketocracy. And I think they still have a mutual fund. But what you hit on, which I thought was the killer app of the idea, is you actually had to have investment professionals, and also investment professionals that were not anonymous and from some of the top funds. And I remember you starting out, I participated in the website.
But the problem I had, at least in the early days, you had to contribute some ideas. And I said, “Man, I’m a quant. I don’t know how to write these long write-ups.” Everything I have, the reason is a quad signal. So talk to me a little bit about the origins. How difficult was it to convince…there’s PMs and analysts on there from Baupost and all these just top funds. How’d you talk people into getting on there, sharing their ideas? Was it easy, was it hard?
Divya: Yeah, it’s a good case study on driving engagement, which I think is top of mind for any social network business. How do you get people to interact on the platform, not just sign up? The first couple months of SumZero were almost crude. I mean, I would basically call my friends from other funds and politely ask them to submit a piece of research. And I think part of the reason it took off and gained traction was because I myself was an analyst.
So there was a certain degree of credibility that I brought and my co-founder, who at the time was also a PM at a fund, he was able to tap into his network, really rely on friends. And I would just get on the phone with these folks from my living room. And every time I get on the phone with an analyst, I would just ask them to send me a list of all their analyst contacts. And as simple as that sounds, that actually was really effective in terms of getting our first couple hundred users. And then I would sort of tell them, like, “Look, guys, like you’re sort of the first batch here, the site’s really just a skeleton of what it will be in the future.”
And I think because they knew me, or, you know, we had friends in common, they sort of trusted that over time the site would actually improve and get better and more useful. And that actually worked. So eventually what happened was, we had enough critical mass where we got our first bit of press and that led to new applications to SumZero and that generated more content. And the more content we had that attracted more users and then that generated more exposure for us.
So it started creating a little bit of a virtuous cycle. But, you know, in the beginning it was very much a chicken and egg problem because the way SumZero worked at that time and it still works a similar way today is if you want access to all the ideas of your peers on SumZero, you had to contribute research, you know, as I said. And that value proposition is a lot tougher to convey when there aren’t any users or when you don’t have a lot of content. So you kind of have to kickstart the flywheel and that sort of happened by brute force.
But I think also, there was an inherent need for this kind of thing because even if you have a friend who knows a company that you’re interested in really well, it’s unlikely that you’re going to have 100 friends that cover that name or a friend for every name that you might be interested in investing in. And that’s where kind of the online solution made a lot more sense. And I think people recognized that. There was just nothing else out there. And we sort of, I think, needed to put a little that way.
Meb: It’s so funny you mentioned the beginning, that kind of genesis of the idea because I’ve been going to these for years, mainly just because I like to have a beer, glass of wine with some friends. But these concepts, these hedge fund idea dinners or portfolio manager idea dinners, everyone will share some ideas and they’ll talk about it. And it’s a pretty critical part of the process because so many of us, as we know from the literature, behaviorally can be overconfident. And getting the feedback from some non-invested outside parties, I think is hugely helpful.
And so these networks, while it may be uncomfortable once you get to a certain size, being able to put an idea out there into the wild and have people…and I think that the big key here is it’s professional people so it’s not Seeking Alpha which is 10,000 rabid people in their underwear somewhere just hacking away anonymously. But SumZero, I think got the right timing on this. Talk to me a little bit about…So for listeners, sell-side research is traditionally meaning investment banks. And obviously, there’s been a lot of conflicts there historically. I was talking with a good PM buddy of mine who describes outside research as like, look, it’s very valuable, but you need to consider…and this is not to denigrate my sell-side listeners, but denigrate the reports is almost like reporters.
You know, they’re reporting a lot of news, you can’t take away the buy-sell recommendations. But a lot of the legislation’s changed in the past 20 years where sell-side resources are going to become even less important than the buy-siders because the disclosures and everything else. So talk to me a little bit about how SumZero has evolved. So it started out where you got your buddies and analysts, post some ideas. It’s been a decade in the making. Talk to me a little bit about how the business has changed in the past 10 years.
Divya: Yeah, just really quickly on the sell side. You pointed out some of the shortcomings of Wall Street research but they’re worth delineating a little bit. So first of all, I’m not sure all of your listeners are aware of this, but the sell side, when they issue a recommendation on a particular stock or the bond, they typically don’t have a position in that security. So if you’re reading a report from Goldman that says to buy shares of Twitter at 30 bucks a share and they put a target price of 40 bucks a share, it’s just worth noting that that analyst doesn’t own shares of Twitter.
So if Twitter stock tanks tomorrow, he doesn’t lose any money, nor does the firm. It doesn’t make him look good, but he’s not really taking any of his own capital at risk and making that recommendation. Whereas on SumZero, if someone says buy Twitter at $30 and it falls to $20, they typically have a decision in that stock and of it goes from $30 to $20, they’ve lost a third of that position. So in terms of kind of the alignment of incentives, I think, getting sort of insight from the buy side itself or from professional investors directly, it’s more compelling because you’re getting information from folks who have skin in the game.
They’re not just saying, “Oh, we really like this stock.” But they actually stand to lose money if they’re wrong. And so I think that’s kind of a very important distinction. The other is, usually the sell-side research analyst is recommending a name that is covered by his firm’s investment banking division. So going back to the Twitter example, Twitter’s not only the subject of Goldman Sachs equity research, but it’s also an investment banking client of Goldman. You don’t have that conflict of interest when you’re consuming research on SumZero.
So, I mean, if I was to, kind of, just at a high level explain some of the major differences that those would rank highly. And the other has to do with the sell side business model, which as you know for the most part is a trading commission driven model. And so as a result, the companies that are actually covered by Wall Street tend to be the bellwether names that you see about and you watch on CNBC or you read about in the news. But what doesn’t get covered a lot are the small-cap companies, you know, a lot of mid-cap companies, a lot of international companies. They just don’t get a lot of covered from Wall Street because Wall Street doesn’t really make a lot of trading revenues or trading commissions on those names.
Whereas on SumZero because the contents coming from investors, they’re going to write about ideas where they see the greatest opportunities where they have the highest degree of conviction. Which again, just results in somewhat, I think, a very different data set, and also one that is typically higher conviction. Usually, when you turn on CNBC, you might notice that a sell-side analyst has issued an idea on a stock but they’ve listed it as a hold or as a neutral-weighted name. That’s not even allowed on SumZero. So in SumZero, you can only be long or short of stock.
And so what we find is that the expected returns on a given stock tend to be typically pretty high. You’ll oftentimes see ideas on SumZero where, if it’s a long, the author might be projecting a double or a triple, as opposed to a 10% gain or a 5% gain. And on the short side, you’ll oftentimes see ideas where the author thinks the stock is going to zero as opposed to say, a 10% decline. And we’ve definitely had example of ideas, just one anecdotal one where somebody on SumZero had posted a short on a Chinese stock where they had done some channel chucks and visited factories, taken photos and noticed that this company didn’t even have equipment in their factories.
That company was written about on the site and fairly quickly fell close to zero in terms of its market price. And on the flip side, we’ve seen folks post research on companies that are totally unknown by the public and has zero coverage from the sell side, really aren’t followed at all where they’ll sort of surface on SumZero and resonate with SumZero community, and then be up more than 10% in a single day because of that exposure.
So I think the market impact of SumZero is really important. And there’s a function of not only the quality of the content, but also the fact that a lot of times people are providing news that are either contrary and/or just really not broadly available, or they’re highlighting companies that just aren’t really talked about.
Meb: Which is by the way, listeners, like the entire point of everything we do, it’s like how good of a discounted cash flow can you really do on Amazon. But the value add on a lot of these companies that no one’s interested in, obviously, seems like more potential for alpha. And how do you screen these? And do you in any way, a pros [SP]…so let’s say I got someone listening from Green Light, David wants to come on, maybe he’s already on there, I don’t know.
Let’s say David wants to come on and I said, “All right, I want to start posting on SumZero.” How do you screen people so that they’re posting high-quality research that it’s not people who are fraudulent or have nefarious purposes or people that are trying to pump and dump some Canadian cannabis companies?
Divya: There’s actually multiple layers involved. So one is, all contributors of ideas have to apply for access. And we vet those folks out manually. And we’re really looking, again, for folks who have worked at funds or are currently working at funds. So we don’t let on day traders, we don’t let on purely momentum-driven investors, we don’t let on retail investors, we don’t let on sell-side analysts. We really are looking for folks who are analysts at fund. Or in some cases, maybe they’re in between jobs, but it’s clear that they have serious investment experience.
And so then once they’re on, if they choose to contribute an idea, that idea actually goes through me personally. So I will vet out ideas on a daily basis. And what I’m looking for…a couple things, one is that the idea contains meaningful discussion on valuation. Valuation is probably the most critical component of SumZero thesis. And that is what differentiates SumZero the most from the stuff you would see on Seeking Alpha or any of these retail focus sites that tend to be much more like product-oriented or just purely descriptive of what the company does.
Meb: A lot of storytelling.
Divya: Exactly. Like, typical retail investment newsletter that focuses really around, what does the company do? Is it growing or not? Maybe they talk about some personal story about management, but it doesn’t really tie to valuation. So you might be really happy about your iPhone and want to say something positive about it on social media, on Twitter, or on Seeking Alpha. But does that mean that Apple should trade at $190 a share or does it mean that Apple should trade it $300 a share?
That’s where kind of the devil’s in the details and that’s what professional investors do all day is they do deep dives to try and figure out what inputs are going to their models, what does the competitive landscape look like? How does that affect pricing dynamics? And all that. And I think that’s really why people come to SumZero. They’re looking for the why, you know, the substance behind the price target, not just the price target.
I think as we’ve grown, a lot of our members have seen SumZero is not only a way to stress, test their ideas and access other people’s ideas, but also as a way to build their own reputations and establish a track record based upon all of their research. And then this is their work product, this is the stuff they do 12 hours a day to the extent they can leverage that to grow their funds or potentially to find new jobs. That’s a big part of our mission.
Meb: We get a lot of people asking for career advice. And first thing I say…and this is obviously a little biased, but I say, listen to so many of these great podcasts. Never has there been a better time to be able to soak up really so much free content everywhere but also to start to build whether it’s your own personal brand, but also as a diary and put the pen to paper on the way you think that you could share and look back on. There’s probably no better framework. So people come on, they start posting. Do you have any examples? I’m sure there’s a bunch where particular success stories of people that maybe were analysts that were unknown or funds that eventually blossomed under the site.
Divya: You might know some of these folks actually, Meb. Does Josh Young ring a bell to you at all? So like, Josh is a great example of essentially an unknown analyst who had been a prolific sort of idea contributor on SumZero for a number of years. And he was able to successfully leverage his SumZero track record to raise capital. And I think he’s raised at least $50 million through connections he’s made through SumZero’s cap intro platform. There are many other guys like this who just consistently posted high-quality research and people obviously notice the individual ideas.
But you can imagine if you see somebody posts a series of energy ideas or maybe they posted a handful of the Chinese e-commerce ideas. And let’s say you’re a university endowment or maybe you’re a family office or some other kind of capital allocator, it’s natural that you might reach out to that analyst to get to know that analyst better with the intent of potentially investing in that analyst’s fund. That’s exactly what happened to Josh. I think there’s been over $400 million of capital raised through these kinds of introductions that just happened organically within SumZero.
Over the years, what we did to kind of formalize this a little bit was kind of create almost like a match.com within SumZero, we just call it our cap intro platform, to just make it easier for them to discover these lesser-known, emerging managers who really don’t get a lot of airtime and give them a transparent, meritocratic lens into how these guys think about investing. And Meb, this applies to you too. Like, if you wanted to create a fund profile for your fund, you could go on SumZero to describe your strategy at a high level, you can upload all your investor letters, case studies, whatever materials you want, fee structures, etc., all the information that a capital allocator would need to have.
And they might notice that, “Oh, like, this manager is interesting, like, let’s go reach out to this manager to start a dialogue.” And who knows what happens from that point onwards. But, you know, our goal is to get these emerging managers as much exposure as possible. It’s good for them and it also gives them an incentive to put their best foot forward in terms of posting research content on SumZero. And we’ve noticed that least a third of the ideas on the platform are from these managers who are actively fundraising. And so it’s been a really good engagement driver for us as well.
Meb: As far as the business…so I’m assuming the main core is kind of the idea factory of people publishing ideas, commenting on others. You mentioned there’s some cap intro, I think there’s also…you said a job vault as well. Do I remember that? Do I have that correct?
Divya: Yeah, totally free tool. If you’re a fund and you’re hiring, you can just post a job opening on our job vault and SumZero members can apply for those jobs. We just ask that they submit research that’s less than two months old for that job listing. And if you’re the employer, you can set certain constraints. So maybe it’s a minimum SAT score, maybe it’s a minimum number of years work experience. But the idea there is to kind of give the employer a more direct point of access to candidates and to give them more data-driven application.
When I remember when I was interviewing, I talked to a few headhunters and they would basically pass my resume around. But beyond that, they didn’t really know anything about me. And I think when you’re on SumZero, if you’re applying for a job, you cannot only submit your resume, but you can submit actual ideas. And then those ideas, obviously they have returns attached to them. Other SumZero members can comment on those ideas, rank those ideas, and there’s just more information for the employer to work with. So that’s become actually a pretty valuable part of the community.
In fact, one of our members, he told us that SumZero is actually more valuable to him from a career standpoint than both of his degrees from Wharton. So I think he’s gotten multiple jobs through SumZero. It’s just an example of how using social media, I think, can really enhance your marketability and just give you a track record, which I think is important. A lot of analysts, even if you do have a job, you’re not the PM of the fund. All of your work product is essentially tied to your PM, not yourself.
So if you don’t have any third party stamping what your performance was, it’s sort of lost in the ether to some extent. But if you’ve got research on SumZero, you can always point to it and say, “Look, I posted these six ideas, here’s how they performed, here was the average return, here’s what other people thought about it.” Having that track record, I think, is critical if you’re going to be in this business for a long time.
Meb: I like that too because it’s not just about the performance, but also because of the posts, many of which are very detailed. You have the process behind it. And so whether or not something worked out, you can see how people think and how they kind of walk through the beliefs. You know, there’s actually been…I found it surprising when I first read them, but obvious in retrospect, there’s been a fair amount of academic research.
Our good buddy, Wes Gray, who I just saw, we both gave talks at Niagara-on-the-Lake. First time up in that area of Canada. It was awfully cold. But anyway, Wes has written a couple of papers. I think the first which may have been his dissertation for under, he said is looking at value investing club. He also wrote one about SumZero and basically found that, yeah, there was alpha and the ideas on the long and short side for both.
Talk to me a little bit about how people, the voyeurs, the gapers, the people that are on there, using this as idea generation, do you hear many stories? And for you, personally, screening so many of these…I’m a quant so I’d be awful at this because every idea sounds good to me when I read them. But talk to me a little bit about how people that are the kind of voyeurs that are soaking up or maybe even using this for portfolio management or ideas there. Is that something you’ve heard some success stories about?
Divya: For idea generation, I would say, I mean, people use it in different ways. I mean, I know guys who literally, like every single day, they’ve got their SumZero page up and they’re reading every single idea. And there are others who create watchlists where if you know if they have a specific focus, either sector-focused or maybe it’s a particular strategy, maybe they only look at garp names, or value names, or deep value names, they’ll set up a screen so that they’re alerted when those ideas essentially hit the site. Yeah, it varies.
There’re also a growing number of folks in your shoes who are kind of more quantitatively-driven who are less interested in individual ideas because they’re just not fundamental analysts but they’re interested in which ideas are getting the most views, which ideas are getting the most ratings, which ideas are generating the most comments. They’re interested in ideas that are posted by members of SumZero who have really good track records or have high rankings within SumZero. We actually have a pro ranking page on SumZero where we rank analysts by the consistency and frequency of their posts.
It obviously depends on the person consuming the content. They all have their own philosophical views on investing. And they try to use SumZero in a way that’s consistent with their own investing philosophy. But there is quite a range of folks who cover…folks who are very fundamental, folks who are quants, folks who only focus on certain market caps or certain industries or certain geographies. And then there’s some folks who are just total generalists where for them, they’ll read through the idea in detail and if they see something interesting, or if they think it’s particularly compelling, then they’ll do further research.
Meb: You guys post some fund posts on occasion, we’ve shared some of them. There’s the best ideas articles you all put out, which I love reading through. I was just looking at one the other day. You’ve also once ran a contest called the Warren Buffett Challenge. Can you talk to us a little bit about that?
Divya: So, the Warren Buffett Challenge was kind of a funny one. We sent the winning idea to Warren Buffett directly. And we actually got a response from him. He was very thankful for the idea. I don’t think he actually invested in that idea because if he did, then I’m sure it would be world news. But in general, we will periodically run contests, again, to drive engagement. So the themes will vary sometimes. Like right now we’re running a contest where we’ve set a market cap floor because we’re looking for ideas that are mid cap to large cap.
Sometimes, like we’ve run short focus contest where we’re really only judging ideas that are short. Sometimes the contest might have an industry theme. We recently ran a contest where the content is actually sponsored by a multibillion-dollar long-short fund in New York, where they just wanted ideas where the individual companies were run by undiscovered great CEOs. So it was called our Undiscovered CEO Challenge was kind of the name of that contest. But there are great ways to drive engagement and we try to come up with rewards that I think meet the needs of our community.
So a lot of times the reward is not cash oriented, but it’s hinged on exposure. So the Great CEO Challenge, one of the prizes…actually, it was a cash prize there, but one of the cash prizes involved an in-person meeting with the founders of that fund. They were all very, I think, grateful to have the opportunity to meet with those guys. They were longstanding tenured veterans of the industry. And so those sort of networking opportunities, you get to meet folks who can be helpful, potentially down the road, like we find those to be really valuable incentives.
Meb: I love it. I’m looking forward to the next Canadian cannabis contest. That’s cool. So all right. So this has been going on for 10 years, the business. You’ve continued to add some sort of different parts of the business. You’ve been adding job vault, you’ve been adding this cap intro, support for emerging managers. I’m pretty sure you’re going to start adding crypto tracking. Just kidding. Maybe you are. I don’t know.
Divya: Well, there’s actually been really interesting crypto research on the platform.
Meb: Oh, okay. For actual companies?
Divya: On specific tokens. But, you know, it’s interesting to read, like, a SumZero report on Ethereum or a SumZero report on Bitcoin versus what you would typically see in mainstream media because the analysis, again, just tends to be a little bit deeper dive. We don’t get pricing on crypto. So it’s like from a return tracking standpoint, it’s tough. But if you are interested in hearing how does a professional investor even…like, what framework that they use to understand a crypto token, there’s some really great content on the site covering that.
But I think you’re going to get at sort of what are we thinking about going forward. So right now, we’re pretty focused on scaling the cap intro efforts within SumZero. And also, we have this data feed that’s typically consumed by quantitatively-driven analysts. So we’re doing a lot of work to kind of make sure that our data feed is reflective of all the engagement that’s going on on SumZero. I think in the long run, what we’re going to continue to do is expand the scope of the SumZero community itself.
So like right now…well, when we started, we really only marketed SumZero to analysts at hedge funds and mutual funds. Over time, we started folding in these capital allocators so that the folks at university endowment, some of the family offices…I think in the real world, there’s a lot of interaction between, obviously, the buy-side community and Wall Street.
And so, thinking about how we can sort of fold in Wall Street into SumZero in a way that’s permissioned correctly where we’re not diluting anything about the experience for our core buy-side members, it’s kind of a next step in expanding the scope of the community itself. So where SumZero becomes more than just a buy-side community but a broader financial community without sacrificing, I think, the quality the engagement, which is really, really important.
Meb: How do you think from the pulpit of watching a lot of the active industry, particularly the HiFi industry, really struggle with flows compared to the Vanguards of the world hoovering up every investment dollar on the planet? So there’s kind of two parts this question you can run with either part.
One, in sort of this era of, one, romping, stomping bull market that has resulted in a lot of passive inflows, but also market cap weighted and low fee. Is the engagement/ the way you view the platform, the way people view it changed at all? And the second part of that question was kind of the same thing with the era of social media and competing for people’s attention. Feel free to take both, either.
Divya: I don’t think that stock picking or fundamental stock picking is going to go away. I mean, this is kind of, almost like reminds me of the humans versus machines argument. I think at the end of the day, you’re going to see funds that have demonstrable outperformance vis-a-vis the market indices continue to generate higher fees or demand and attain sort of high fees that we typically think of as 2 and 20 or fees in that neighbourhood.
And then I think a lot of the funds that can’t demonstrate that type of performance or can’t deliver performance that’s consistent with their marketing will either see capital outflows or reduction of fees or both. I think the ETS industry and what kind of happened in terms of the Vanguards of the world, obviously, they’ve exploded. And now, I don’t know BlackRock, I think is managing like $5 trillion or $6 trillion, which is crazy when you think about it. But I think some of that is cyclical. We’ve obviously been in the middle of a bull market for the last 10 or 11 years now.
I think when that starts to slow down, maybe that gives an opportunity for active managers to start generating higher market adjusted returns or risk-adjusted returns. You think that if we kind of move into a world where there’s greater volatility that we’ve sort of active stock picking or active managers more room to make money. But I don’t see the fundamental industry going away. I just think they’re going to have to earn their keep a little bit more bigger. And, you know, maybe there’s some concessions on the fee front.
But we’ve already seen that. I think most of the funds that we come across don’t charge 2 and 20. It might be 1.5 and 20, or 1 and 17, or something in that neighbourhood. So clearly, there’s been a lot of pressure on that front. On the flip side, a lot of the quant funds, I don’t think have necessarily delivered on their promises either. And you might know more about this than I do.
But there are a handful of very quant-driven funds that have really built brands and have, I think, generated…or at least amassed very large capital pools. But then there’s a very long tail of quant funds that have raised some money but the returns don’t necessarily…they’re not necessarily higher than their fundamental counterparts. It’s a little bit of a mixed bag, I think, in terms of the narrative of AI and quantitatively-driven funds usurping or displacing fundamental funds.
Meb: There’s two kind of offshoots I want to touch on. First is, I think probably people listening who love this idea and concept may say, “Divya, why don’t you think about launching a private fund yourself or a mutual fund or an ETF and we can call it the SumZero best ideas or emerging managers or, hell, launch six different ones and chop it up into small cap, ideas, etc. Has there been any seduction, Divya?
Divya: I think for the time being like we would rather be a subscription-based SaaS business than a fund ourselves. The reality is if you’re going to run a fund, sort of the upfront fixed costs of getting that type of infrastructure up and running and just the amount of sophistication you need from a quantitative standpoint is more significant than people realize. And when you do look at, I think, some of the more successful quant funds, you look at their teams, I mean, some of them, like Renaissance, will have a couple hundred PhDs grinding out analysis on a daily basis.
They’re not like half baked. They’re fairly well oiled and professional organizations. And that’s their sole focus and they spend all their money honing those tools. You know, we’re throttling our origins in more in like being a provider of unique alternative data. And I think that’s where we have more of a competitive advantage. It’s not to say that, you know, we would close the door on launching our own one day, but I think right now we have so much on our plate. And I think there’s a lot of opportunity in front of us to just be a provider of data than the manipulator or the trader that’s using the data.
Meb: Sure. Second offshoot, this is something that I found to be a frustration, and there’s various reasons why it may or may not exist. But if anyone was capable of figuring out this problem, it would be you guys and your team. It’s a smaller audience, but you’ve seen in pretty rapid evolution, and even more as Lyft and Uber and all these companies go public, and met a bunch of young millionaires all over the country and world.
A big increase in private investing whether it’s late stage, angel, Series A, but also even the platforms, you know, individuals, doctors in the Midwest and engineers in Florida, all over are investing in private companies. And if you think it’s challenging getting information on public companies, well, private, forget about it. And it would seem to be an interesting opportunity, maybe not as big of an opportunity, but maybe one where people may pay a lot more to develop a platform for private companies too. Anything ever crossed you all’s mind?
Divya: Yeah, we’ve talked about it. The issue with private companies is they typically don’t trade. So even if you read a great piece of research on, take Lyft as an example. Nowadays, private companies are staying private for so long that it’s a little bit less actionable.
Meb: There’s two buckets that I would put them in. There’s the late-stage private which is like, now, no longer Lyft but the Ubers of the world or Pinterests of the world where you could have people that maybe have some value add. And there’s places you could buy those like SharesPost or EquityZen. But then there’s also the ones that are doing the fundraises at $10 million market cap on pure old-school angel list or whether it’s on Wefunder, and those are time sensitive. We’re like, “Hey, this company is being syndicated or is raising money.”
Divya: I think actually our cap intro platform not far away from handling those sort of, like, let’s say, deal by deal situations. You know, right now, usually, it’s a fund that’s trying to raise capital, but it could, with a little bit of tweaking, be a company. And so pick your favourite private company, maybe it’s like your local cupcake or bagel shop. If they were trying to raise capital, in theory, they could create a profile for that specific raise. We haven’t marketed the site that way but I think that platform could be extended to include private deals as well.
Meb: Marinate on it because I would pay up to $10,000, no more, per year. But up to that because of the amount of negative screen you’d get out where someone said, “Oh no, you can’t invest in that company. That CFO is a total dirtbag.” Or, “Oh, yeah, like I’ve known that team forever.” There’s a lack…we’ve been moaning about this for like four years on the podcast, or however long this podcast…around two years.
Divya: You know, I thought you were gonna get in…when you started talking about the younger folks starting to invest, I thought you were gonna ask me about robo advisors, which is like a whole another trend.
Meb: Yeah. What do you got?
Divya: Well, I just think it’s fascinating because those robo advisors, their whole model is we’re going to charge you fees there are a lot lower than traditional private wealth. But all they’re ultimately doing is investing your assets into Vanguard or some other basket of ETFs. So I’ve never totally understood that business model because it’s just another layer of fees upon fees.
I feel like a lot of it is just marketing because they seem to market well to millennials and other people who are fairly tech savvy, but don’t necessarily follow the financial markets. Maybe they’re maybe a little burned by the financial markets because of the 2008 market crash and they see some of those robo advisors as an alternative to Wall Street in a way. But the reality of it is, you could easily avoid that fee altogether and just buy a passively managed ETF and pay hardly anything and never have to…
Meb: And starting now, there’s even choices where not only do you pay hardly anything, you pay nothing. I saw SoFi has the zero…and someone else is coming out one where they subsidize it with a waiver and they actually pay you to own it. Crazy time to be an investor. But then here’s the funny thing, though. I was doing this presentation last week in Canada and I talked about, I said, “Look, we all talk so much about this fee destruction, how all these flows are going into low-cost market cap weighted index, which is great, which is fantastic.”
But then I showed this chart and I said, “If you look at the asset allocation fund space and you look at ETFs,” and I showed the chart, “the ETFs don’t even register on the chart.” There’s like $7 billion in asset allocation ETFs, which is cool. But then you compare it to the asset allocation mutual funds. So tax inefficient. And this is strategic. So buy and hold, we’re not tactical, we’re not alternative. Anything else just strategic buy and hold asset allocation, there’s still $1.5 trillion that charges over half a percent, many of those well over 1%.
So it’s funny we talk about a lot, not just we, me and you, but a lot of people about the optimal way to invest because most of us are rational. But then we forget about the generations of people who don’t even know what they’re paying, who have these terrible portfolios that they’ve been sold or invested in or forgot about, or died or got divorced, and are paying 1.5%. So will they be a sustainable business model? I think there may be a couple. I think Betterment of the independents will survive. Certainly, Vanguard is now…it was like $150 billion last I saw that they’re automated. So we’ll see, but certainly, anything that comes out of those expensive do nothing funds.
Divya: Yeah. There are a lot of ETFs, especially if you’re outside the United States, like if you’re looking at investing in Asia, you’re looking at investing in India, China, whatever, where oftentimes owning the ETF means that you’re basically buying a lot of really dubious names that like don’t necessarily have good corporate governance, or could just be outright fraudulent for whatever reason, but they get looped in because they’re part of some index.
Though it’s mechanically convenient to own that ETF, like, you would be much better served with some sort of active management. So I don’t think ETFs are going to clobber the world and take over everyone’s portfolio allocation. There’s plenty of room for good active management.
Meb: Absolutely. We often tell people, and this drives my Boglehead friends crazy, I said, “You know, Vanguard actually has more active funds than then they do passive. Now, they have more money in passive but they actually have more active funds in passive,” and they usually go crazy. But…
Divya: It’s possible that people…I mean, to some degree, people will use the ETF as a placeholder, right? So for example, let’s say you’re a New York resident and you might, for tax reasons, want to build a muni bond portfolio, you might own a high-yield muni bond index ETF as a placeholder, and as you see bonds that are interesting to you and provide the right yield profile, like, you might sell some of that ETF and exchange it for an individual bond.
Yeah, I can see that kind of being, what I think, a very obvious use case for ETFs but…or I think the other use case is if you literally just want to own everything, you know. And you want to own an ETF that’s got a giant basket of names. And what I’ve never really understood are the people who buy ETFs where there are 10 underlying names or 20 underlying names, like why would you pay a layer of fees to have a small amount of diversification?
Meb: Because people are crazy. Because people are insane. We gotta get going, we’ve got to wind down because we’ll keep you forever. But a couple more quick questions, you know, as someone who’s, man, done all sorts of things. You’ve been an entrepreneur in the social space, you’ve gone to grad school to starting an investment business.
What else keeps your mind occupied these days? As you look out kind of the future look around the space, is there anything that having somewhat of a curious mind, is all that brainpower delivered to SumZero? I’m sure it is. Anything else we’re thinking about these days got you excited?
Divya: I have a seven-month-old daughter, so now that’s been…
Meb: Congratulations. The first six months was really dark for me. I was like, man, all my friends lied to me. This fatherhood thing is totally overrated. But then post six months it started to get a lot better, it’s a lot of fun after that. So that’s a good excuse.
Divya: There’s that whole book series, you know, ‘What to Expect.” I made sure not to read it at all. I’m just gonna go in bright eyed and bushy tailed, and it’s been amazing. And I have noticed a couple things have changed in my life. I find myself like doing laundry with a far higher degree of frequency than I was before the baby.
But I think to your question, like honestly, the stuff that kind of outside of work that seems to be on my mind at least is more about the political condition that we face in the U.S. and sort of the tone of discourse both in America and on a global basis. Now, obviously, this has an impact on the market so it’s not entirely unrelated. But that’s been, I think, really interesting to watch.
And you probably sense this as well or see this a little bit. It’s just almost the average daily drama quotient, I think, has gone up quite a bit in sort of the last couple of years versus at least when I started my career. So following that, I think is…I’m not even sure if I intended on this happening, but it seems to be all-consuming at times.
Meb: Yeah. Well, I mean, it’s easy. You know, if you look at…there’s an article…I can’t remember the name of it offhand. But we’ll post to the show notes along with all this other stuff we talked about today with SumZero, best ideas, and fund stuff. There was an article, so many of us find ourselves just kind of all consumed with everything social and short-time horizons and everything around those ideas and phones.
I mean, it’s the…but there’s an article, it’s like 100 things to do with your phone to make it work for you instead of it just being a constant distraction and awful. And I think I must have implemented like 50 of them. And just that alone made life a little bit better. But the same sort of thing applies to, God, almost everything. But it’s funny you mentioned the discourse on politics, having just gotten back from the U.K. where we have…it’s like talking about families. Everyone has a dysfunctional family. Every country has a dysfunctional government just in different ways. So Brexit was obviously the topic of the day, but crazy everywhere.
Divya: Yeah, it’s funny because sometimes I ask myself like, is it crazy everywhere or is it just the way things are described in the media being amped up to 11 for reasons that are often economically driven? I mean, obviously, there are a lot of perverse incentives out there in terms of, like, what we can assume when we do use our phones or turn on our computers. And then how much it is real, I think, it’s a little bit of a challenge to sort that out.
Meb: Yeah. I think that’s been a big surprise for me personally, over this last cycle is maybe being young and naïve in my earlier years thinking the media wasn’t necessarily…I mean, I always had an idea that it was biased but then starting to see the internet being the great disinfectant to see how much that can take place is astonishing. By the way I found the article. Listeners, if you don’t want to go to the website, it was called “How to Configure Your iPhone to Work For You, Not Against You.” And it was on Better Humans website, whatever that is. So check it out.
Divya: I think that’s why a lot of folks have sort of moved their mindshare towards podcasts and just other venues for discourse that, you know, I think, have a different tone, you know, and maybe a more authentic way of communicating. I think people generally want that relief from the mainstream and there’s a lot of different ways to get it. And I think, for me, I try to get news from a variety of sources. But I would say now more than ever, I will triangulate with people I trust in real life and not just solely digest stuff from the internet because so much of it is like total noise.
Meb: I think there’s a big trend. And I’ve moaned a lot about this on Twitter and blog posts over the past decade about human curation. And your company is essentially one concept of that where these people are professionals in curating the best investment ideas. I mean, we did it out of just throwing my hands up in the air about the investment research business over with the idea farm where I said I can’t handle this daily flood of just noise and really said I want to send out the best one or two things per week. And…
Divya: That’s Twitter’s biggest problem is it’s just a fire hose of noise because of the quasi-anonymity that sort of exists on Twitter, it’s even bigger problem because you have people who would just say things when really they’re saying them behind kind of the pseudonym. And maybe it’s the format, you know, the fact that your family isn’t necessarily on the receiving end of your comments if you’re posting on Twitter. So the repercussions don’t feel as tangible.
The 140 character format lends itself to, I think, a lot of very conclusory, oftentimes hyperbolic commentary. That’s obviously not representative of all of this stuff that you would read on there, but it really has created this flood of noise. And then if you’re on the receiving end of it, you spend most of your time trying to figure out how to filter it, which isn’t really, I think, a great experience.
Meb: Though I said that some of the best accounts on Twitter, and all of the worst, tend to be the anonymous accounts. And the problem is it’s about 100 to 1 on terrible to wonderful.
Meb: I mean, I have every possible iteration of republican democrat, President Trump, politics, Clinton, anything about politics, I want to get out of my feed and they still make their way in anyway. But if someone could figure out a little better way to filter out news flow to be thoughtful, that’s obviously a billion-dollar idea.
Divya: It is a billion-dollar idea. It’s more than a billion-dollar idea because you look at the market caps of Twitter and Facebook and the other major kind of social media platforms, they’re sort of on the hook now for being the moderator. And this is where Congress, I think, is completely confused. But, you know, asking Twitter to be the town hall is also in a way asking for them to figure out for us, you know, what’s real, what isn’t.
And that’s a really, really hard problem because I think even we, as society, can’t figure out on the margin, like, what content is, A, for publication and what is…There’s just so much disagreement around what’s appropriate on social media and what isn’t across age groups, across…you talk to somebody on the left versus somebody on the right, just vast disagreement. I don’t know if you caught that Zuckerberg “Washington Post” letter that was published, I think it was like last week.
The whole thing was really, like, almost like a call for clarity around what sort of guidelines these companies should work around or work with to make sure that content moderation is not stepping beyond a certain boundary. And at the same time, sort of making everyone happy. And for a lot of these companies, like they’re dealing with inconsistent voices not only within individual jurisdictions but then most of these companies are global. So how do you moderate content in Germany versus the U.S. versus U.K. versus Italy? It seems like a giant mess.
Meb: Yeah. For me, it’s like the Warren Buffett too hard pile. I don’t know. I don’t have any good answers there. The furthest we could get was being pissed off that none of the podcast platforms have ratings. So we eventually just said, we’re going to do it in-house and send out the top investment podcasts of the week until one of these idiot platforms finally adds some sort of rating to them. But that’s our little tiny corner of the contribution.
Divya: There’s very little transparency around whether you’re a podcast channel or if you’re a YouTube channel or some other profile on social media, what your level of exposure is. And so I know for a lot of like conservative groups, for example, like shadow banning has become a really big thing. It’s become a political problem for these companies because now they’re being accused of essentially shutting folks off without really any accountability or any transparency.
Meb: So, Divya, as we wind down, last question we ask everyone, as you look back over the many years, what’s been your most memorable investment? Could be a bit good, could be bad, could be anything in between. Anything coming to mind?
Divya: I gotta say Facebook.
Meb: Yeah. Give the listeners…we didn’t really get into it but give them the quick overview for those who aren’t familiar.
Divya: Yeah. So the Winklevoss twins and I were roommates in college. And I asked them to help me out building out this concept called Harvard Connection, later renamed ConnectU. Zuckerberg was two years younger than I was. He was at ’06, I was ’04. So there was a guy who was ’06 who was brothers with a good friend of mine who actually knew Mark. And we had been chatting about this Harvard Connection idea and like, I was just looking for a programmer and he recommended I reach out to Mark.
The rest of that story has been sort of documented in the movie, but essentially, you know, he took the idea and like launched Facebook, which is conceptually the same. And that just exploded from…I mean, a lot of people don’t realize this, but I think in the first 10 days of Facebook launching on the Harvard campus, they had, I think, 8,000 to 10,000 users within, like, the first 2 weeks call it. So, you know, obviously, like Mark wasn’t printing out flyers and knocking on doors like a politician would, but this was just like pure viral growth.
Kind of knew immediately that there was no way that we were going to be able to find a developer and launch the same thing at a later point in time. And I think within a few months, I mean, he was on…well, Facebook was on multiple campuses and, you know, had grown quite dramatically. And then he got that funding from Peter Thiel and kind of grew from there. But to make a long story short, I ended up in litigation with Facebook.
And in 2008, we settled with Facebook. And what was interesting was at the time we settled with Facebook in, I want to say, March of 2008, if I remember correctly, we got some shares in the company. And at the time, I was 26 or maybe I was 27 or something like that. And I hadn’t really made any money. I had some savings, but like was basically living paycheck to paycheck and I was thinking about going to grad school. And so it was kind of a new experience for me in a way.
But then in October of 2008, the equity markets collapsed. As I was looking at Facebook’s share values in the secondary markets, they were collapsing as well, to the point where they weren’t even trading. There was, like, super-wide bid-ask and it was trading for like maybe a few dollars a share. I was like, oh man, like that sort of wiped out the settlement. Sort of made the whole settlement not worthless, but worth a lot less than it was when we actually settled with Facebook. And then I just kind of sat on it for a while.
And 2012, the company went public. And I’m sure you guys remember this but went public with a lot of fanfare. But then the stock collapsed by another 50% within the first couple months of the company IPOing. You know, a lot of folks were selling Facebook shares at $20 a share, 25 bucks a share, $18 a share. And like one of my best decisions is just to sit on it, just hold on it, hold the position, kind of wait.
And the thesis at the time was that they wouldn’t be able to transition to mobile. People were worried about Facebook not being able to convert from being a desktop-only app to being a mobile app. A lot of folks just dumped their shares. And over the next couple of quarters, and certainly next couple of years, they obviously made a very significant transition and completely reoriented the entire business around mobile. And so the stock is a lot higher now than it was then.
Meb: Are you still a holder? Are you in for the long haul? What’s the…
Divya: The way I think about investing is very, very much like what can I own today that’s going to compound over the next decade? When you can find those kinds of names, like, you don’t need to be worried about whether you’re paying 15X on earnings or 20X on earning. All that just gets washed out over time. And when you look at the sheer number of monetization opportunities they have and sort of their portfolio of the apps, you’ve got obviously the main app, the Facebook blue app, or whatever you want to call it. That’s sort of their main engine or sort of revenues and profits.
But Instagram is obviously…it’s matured a lot, but I think it still has a long way to go. But you have WhatsApp and Facebook Messenger that are completely unmonetized, they’re just sitting around. And so just sort of ignore that. You know, you can buy Facebook today, and essentially get WhatsApp for free, right? I mean, that’s crazy.
When you look at some of their Asian competitors, when you look at Tencent or you look at Alibaba, you look at how businesses work in Asia, and just how significant messaging is as a business, there’s no doubt that Facebook is going to replicate some portion of that business model as it makes sense. And I think now because of the media industry, and just the almost obsessive nature that the media has around Facebook, I think part of it is because they recognize that Facebook’s a real threat to their business models.
You know, whether that’s true or not, we can debate but it’s created this opportunity where it’s just lot of negative…this onslaught of negative PR that’s really depressed share price. So you have the situation where you’ve got a very clear or isolated reason for like, why is the stock where it’s at? Everyone kind of knows the answer to that question. And I think it’s the kind of thing where eventually the overall earnings power and kind of the fundamentals of the business will be more important over time than some of these headlines. And I think also, as with a lot of news cycles, like they come and go, but they generally don’t last in perpetuity. I think the transformation today is not too dissimilar from the one in 2012, which was, okay, how do we go from, say, desktop to mobile?
Now, I think that the transition relates to privacy and sort of things that I think during the first couple innings of social media, most social media companies probably thought that like privacy doesn’t really matter, or rather, privacy controls don’t matter. Now, I think that tune has completely changed and a lot of these companies are thinking about how to make privacy a more integral part of social media experience to the extent that they can solve that problem, at least that narrative goes away. And they can refocus on just building new experiences that connect people. You know, again, if you’re the type of, like, long-term holder, like, I think it’s a really good name to own.
Meb: Well, it’s funny because that’s why I’m a quant because I guarantee you I would have sold it every month of every year of the past decade if I was in your situation. But that’s why you’re the fundamental guy and I’m not because I don’t have the fortitude to sit through that. But I love it. Yeah.
There was a great guest on…I want to say it was [inaudible 00:56:32] who had an interesting concept where he said when he makes private investments, he tells the CEO and the founder, says, “My plan is to never sell.” When they would say, “Well, what’s your exit criteria?” He says, “I plan on never selling.” So I love that idea. Divya, this has been a lot of fun. Where do people find you? What’s the best places to keep track what you’re up to and everything else?
Divya: Well, they can go to SumZero. I get all of our support email. I’m on LinkedIn. I’m on Facebook. I’m on Twitter. SumZero has a SumZero Twitter account as well, @SumZero.
Divya: We’re pretty easy to find.
Meb: Well, we’ll add all those links to the show notes. Listeners, mebfaber.com/podcast. Divya, thanks so much for taking the time today.
Divya: I appreciate it, Meb. Thanks so much.
Meb: Listeners, you can find archives, show notes, mebfaber.com/podcast. If you’re loving the show, hating it, leave a review. We read all of them. We love it on iTunes and you can find the podcast on Breaker, Stitcher, Radio Public, all of the other podcasts apps. Thanks for listening, friends, and good investing.