DoubleLine Capital’s Jeffrey Sherman and Sam Lau welcome Dr. Ben Hunt, co-founder and chief investment officer of Second Foundation Partners, and creator of Epsilon Theory, a newsletter and website that examines markets through the lenses of game theory and history. This episode was recorded on Dec. 15, 2020. Messrs. Sherman and Lau and Dr. Hunt discuss, among other topics, market narratives versus market fundamentals, common knowledge versus public knowledge, fiat news versus fake news and the value of working on social issues on the community level.
Dr. Hunt explains the focus of his professional career for 35 years: How are we as social animals, particularly in this biggest game in the world, public equity markets, systematically impacted by the messages and words we hear? And, why has that become a much more important driver of what happens in markets than anything to do with fundamentals? As an example, he cites Marc Benioff of Salesforce.com framing the firm’s quarterly performance by using the firm’s own metric “pro forma net revenue growth” to great effect. These types of executive performances take advantage of the 24-7 “news channels,” such as CNBC, which do not have a lot of fundamental financial news to cover every day. In response, to fill the time, you have a series of people come in and present their opinions as if they were news (“What’s your story about this sector?”). According to Dr. Hunt, it’s a “constant flow of what I like to call fiat news. It’s not fake news, but it’s opinion presented as if it were news.”
Abetting this dynamic, says Dr. Hunt, is a change in technology with “dopamine machines” that we are hardwired to respond to. They include “the dopamine machines that we all carry around in the form of our smartphones that present us this megaphone in our ear” that delivers narratives. There are also the always-on trading vehicles, such as Robinhood, that you treat like a game. “It really is a dopamine machine, right? … ‘Oh, you’ve mastered your first equity trade. Want to level up and try some call options?’”
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