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"I don't look to jump over seven-foot bars; I look around for one-foot bars that I can step over." |
— Warren Buffett |
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The hidden gem bias of overactive investing |
Professional investors are always looking for seven-foot bars to jump over. |
That's partly because they mentally equal-weight the market: Stock pickers will devote the same amount of time researching any reasonably liquid stock because a 20% return made in, say, News Corp (the smallest stock in the S&P 500) is just as valuable as 20% made in Apple (the largest). |
In fact, profits made in News Corp are more valuable to professional investors: Active investors are at least as motivated by an opportunity to look smart as they are to make money. |
Outperforming the index with an obscure stock makes them look smarter than outperforming with an obvious one — there's no glory in being long the largest, most obvious stocks. |
Investors love stories even more than they love numbers and the story of every large-cap stock is already so well known they become uninteresting to active investors — even when the story is as something new as "AI." |
They prefer complicated stories instead — ideally so complicated that they'll look smart even in just the telling of it. |
Finally, active investors are constantly looking for the next thing to do — instead of just holding the best stocks, they are always looking to switch into something different. |
Some of this is a response to incentives: To justify their fees, active managers have to at least give the impression of being, well, active — no one will pay you two and twenty to buy and hold the seven biggest stocks in the S&P. |
But the impetus to stay active is mostly internal: 100% of active investors believe they'll be among the 5% of investors that outperform the market. |
The asset allocators that invest with hedges think so, too — like the parents of Lake Wobegon, every asset allocator thinks their active manager is above average. |
That, at least, has been my observation over three decades of trading and investing: Nearly every professional investor suffers from some combination of contrarian bias, action bias and narrative fallacy. |
The result is that active investors are structurally underweight in the largest and most straightforward stocks, favoring smaller, riskier, and more complicated ones. |
I believe this "hidden gem bias" is a large part of why active investors almost always find themselves underperforming the indexes. |
Something similar may be happening in crypto too — where overactive investors can't resist investing in overcomplicated altcoins. |
Alternative coins |
The term "altcoin" is generally used to describe any crypto token other than bitcoin — it's something of a throwback to a time when the concept of having more than one crypto token to choose from was still a novelty. |
There are now millions of tokens to choose from, however, and referring to them all as "altcoins" fails to capture their diversity — so much so that Jeff Dorman finds it "criminally stupid" to continue using the term. |
But I still think it's useful because I often find myself following general statements about crypto with the caveat "except for bitcoin" — saying "altcoins" instead of "crypto" allows me to skip the caveat. |
Making a distinction between bitcoin and everything else might also help explain the current state of low sentiment in crypto — low sentiment that's an apparent disconnect from the good news flow, as Dorman details in his most recent note. |
I think this disconnect is partly a result of our motivation in crypto investing: We buy altcoins mostly to look smart, because as with mega-cap tech stocks, there's no glory in simply being long bitcoin. |
This has been a problem lately because almost everything in crypto other than bitcoin has gone down recently, which is making us look dumb. |
The playbook from previous cycles has been to buy risky, high-beta altcoins when bitcoin was going up, so that's what we've done this time, too. |
Bitcoin, the comparatively safe, low-beta crypto, was — counterintuitively — the thing to own when bitcoin was going down (because everything else would go down more). |
That beta-adjusted strategy hasn't worked this time around, which is kind of annoying. |
But also kind of hopeful? |
In equities, mega-cap tech stocks have outperformed for two decades now, mostly because they've had the best fundamentals paired with pretty reasonable valuations. |
This has caused intense frustration among overactive stock pickers who can't fathom just buying and holding shares of the seven biggest companies, even if they happen to be the seven best companies. |
In crypto, it's been the reverse: Bitcoin has outperformed because everything else had bad fundamentals and unreasonable valuation. |
This has caused intense frustration among overactive crypto investors who spend a lot of time and effort trying to identify the next big thing. |
But I find this hopeful because it may mean that crypto is growing out of the stage where investors are rewarded for buying the riskiest tokens and into a stage where they're rewarded for buying the best tokens. |
Bitcoin has arguably outperformed this cycle because it's been the best token — the one crypto that has indisputably found product-market fit (as digital gold). |
Overactive crypto investors, like their counterparts in equities, have underperformed because there's no glory in simply being long bitcoin — they insist on seeking out seven-foot bars to jump over instead. |
Nevertheless, I suspect (and hope) that active token pickers will at least have a chance to outperform from here because crypto is finally starting to generate revenue and if cryptos have revenue, then fundamental analysis may finally start to matter. |
This may prove to be hubris — a willful falling into the "hidden gems" trap that I just warned you about. |
But even Warren Buffett is susceptible to the siren call of overactive investing: "I think I could make you 50% a year on $1 million," he once told Bloomberg. "No, I know I could. I guarantee that." |
If Warren invested that $1 million in crypto, I don't think he'd be stepping over the one-foot bar of bitcoin — even Michael Saylor doesn't think bitcoin will compound at 50% from here. |
He'd be looking for some hidden gem altcoins, instead. |
Also, it makes you look smart. |
— Byron Gilliam |
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Lido V3 Deep Dive |
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Konstatin Lomashuk and Hasu join the show to discuss liquid staking today, Lido v3's marketplace model and the fungibility of stETH. Tune in to find out what institutional stakers need and how Lido v3 makes it possible. |
Listen to Bell Curve on Spotify, Apple Podcasts or YouTube. |
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The lines between crypto, traditional finance, and policy aren't blurring, they're disappearing. The people making that happen? They're speaking at DAS NYC. |
Cathie Wood (ARK Invest) on the seismic shift in capital allocation and why the biggest bets are still ahead. Caitlin Long (Custodia Bank) on the battle for crypto-friendly banking and why regulators are playing catch up. Dan Tapiero (1RT & 10T Holdings) on the real institutional play — where the biggest money is quietly positioning.
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This is where the people with real skin in the game lay it all out. |
📅 March 18-20 | NYC |
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 | carried_no_interest @carrynointerest |  |
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The Venture Capital Apocalypse is coming...it might even be here already. The venture capital asset class is facing a watershed moment. Orphaned/Zombie VC software companies are everywhere. I'm a 'DATA DRIVEN' guy so I'm going to show you 6 graphs that illustrate how dire the… x.com/i/web/status/1… | |  | | | 5:18 PM • Feb 11, 2025 | | | | | | 851 Likes 108 Retweets | 30 Replies |
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 | Santiago R Santos @santiagoroel | |
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The current state of private equity and why every PE fund will eventually use crypto to drive returns: > there's over $3 trillion of unrealized value across 28,000 unsold companies in global buyout portfolios, and more than 40% of these investments are four years or older -… x.com/i/web/status/1… | | | 8:57 PM • Feb 11, 2025 | | | | | | 28 Likes 1 Retweet | 2 Replies |
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