Size Makes Noise
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Ronald Wayne left billions of dollars on the table when he sold his 10% stake in Apple back to his co-founders only twelve days after the company was incorporated - for a mere $800.
Here are my next seven tweets to find out what this money mistake teaches you about personal finance. Barf.
It’s not the fact that $800 is worth $4200 today, or even that the likelihood of him holding on to the stock all these years is improbable. Steve Jobs only held 0.6% of the company at the time of his passing.
This factoid tells you very little about anything. Like every other company, Apple started with just hope and a dream, and one guy quickly soured on the Koolaid. Most companies fail. While it’s romantic with the distance of 50 years and vintage rose colored glasses, a couple of hippies messing with circuit boards was a very long shot for a guy who had just been burned by a slot machine business.
It’s tempting to unroll that thread because $800 is a tangible amount, and a billion dollar fortune seems impossible. I’d like to believe every decision I made of that magnitude had the upside potential of the world’s first trillion dollar company.
Mundanely, most of personal finance is more like making tea and being patient. If Ronald Wayne took that distribution and invested it in the S&P 500, he’d have about $33k. That’s not a bad outcome at all - it’s almost eight times the purchasing power. Apparently he was a gold bug though, which only performed half as well.
If there’s any lesson to be gleaned from this anecdote, it’s to look at how dumb, smart sounds. You don’t hear about the tens of thousands of people who kept their stake in NewCo and watched it fizzle out. A single piece of information in this context is going to send you down the path of palliative falsehoods, eschewing the unsexy truths of cashflow and compound interest.
Much to do is made about large trade prints. When something big hits the tape, it tantalizes market watchers and activates the thread bois. **BIG TRADE ALERT** Look at how smart, dumb sounds.
Options markets price outcomes with the ebb and flow of liquidity. If an order is disproportionately large, it will have a gravitational impact on the pricing of surrounding strikes, expirations, and even related products. Inputs must shift to reprice this new information. But most of that happens in the milliseconds after the fast order drop alerts the highly attuned participants. If you’re reading the OPRA feed, let alone Twitter, you’re skating to where the puck has been.
A large print makes it on the evening news because big numbers are fun. Infotainment speculates on what the trader spending $5 million on 50,000, $1 puts is thinking. What makes him so confident AAPL will trade down more than 20% in the next three months?
First of all, we don’t even know if this is a he or a she, an activist hedgie or lazy trust fund kid.
With an annual salary less than his losses on a tough day at the mines, I remember watching a well funded sole prop piddle away nearly seven figures with an unnecessarily complicated short market strategy as stocks trebled in the years coming out of the Great Financial Crisis.
Logging in from Miami, he didn’t care. My size is not your size. $5 million bucks is a FIRE fanatics wet dream, but it barely puts a dent in one of Ken’s monthly exchange bills.
As pig headed as we thought that trader was, it was all part of a bigger picture. The PnL statement that we saw bled red all over, but I have no idea what the rest of his portfolio looked like. For all we know this was a hedge against other holdings in equities, real estate, or bitcoin.
I currently have a client that loves buying put spreads. We look for cheap opportunities and fund them with cash from the popping interest on short term notes. Sounds pretty doomer? He’s actually incredibly bullish on new technology and works at a fast growing startup. If the market rallies, so do their exit opportunities. There’s opportunity cost, but if things go differently he has a nest egg with a downside kicker.
Just looking at the options trade doesn’t tell you very much. On an institutional level, there are many funds that have mandated protection clauses. Sometimes the far out of the money calls in VIX are getting bought by a ranting YouTuber with a safe full of bullion and a Colt 45, other times its a very buttoned up mutual fund satisfying the terms of their prospectus. The billion dollar bond ladder is happy to give up part of a month’s coupon to smooth their mark to market if Tim Cook stumbles next quarter.
In AAPL, VIX or any of the household names, the markets have deep, richly textured liquidity. It’s a beautiful thing. That’s precisely what makes them a good place to lay off macro risks in size. They might not be an exact proxy for whatever risk an individual or fund is trading, but good enough goes a long way.
A paradox of trading is that big trades don’t matter unless they do. High vol is usually not high enough, and low vol is usually not low enough. Yogi Berra belonged in the pits.
It’s so tempting to glean meaning from a single print because in certain situations it can reveal a nugget of true information. The less liquid a product is, the more significant any single trade will be. There are thousands of ways to wrap a greek profile in SPX, but FUBO only has five strikes in any given month.
Knowing who is on the other side of a trade or a position is valuable if it has predictive power. When a dealer has a certain position on, you can roughly predict the direction if not timing of their hedging behavior. If a large customer put on a trade in a name like FUBO, when they come again for that strike, you can guess which way they’re going.
A 10,000 lot time spread in a biotech with pending announcement doesn’t need any additional context. While the company hasn’t made an official statement, every options trader knows what is or isn’t about to happen, and just the whiff of an order has everyone backing off their bids. For anyone reading about this ex-post, the size print might be novel, but without more information than Mr. Market, it isn't an opportunity.
Deeper insight from the market requires asking when, why, and how; over and over again.
The best trading ideas come from battle testing a hypothesis until there’s no risk unturned. Poke holes in an idea until it’s strong enough to hold water. “Why me” was floor shorthand for giving something that sounded too good to be true, a full nostril smell test.
It takes some work to turn a collection of anecdotes into useful data. You need more than a large trade announcement to identify opportunities. With contextual information and layers of filters we can start to sift through the mostly meaningless sample.
Alerts and audits are an important part of any trader’s toolkit - there’s no better way to keep track of all the different things going on. But before you scoop a low IV percentile with both hands or whack what looks like an expensive put, you have to be sure of all the reasons why this ISN’T a good trade.
Have you checked for corporate action stubs? What about open interest and volume? Are lines nearby reasonably valued? How wide are those markets? 147% vol sounds rich, but how much is the stock moving close to close?
If anecdotes paid the bills, social media could be rebranded universal basic income. Unfortunately there’s a lot of sizzle and not much steak. Size makes noise, but it provides little signal.
While Wayne has publicly said that he does not regret selling his Apple shares, due to the risk profile at the time, he does have one regret. “In the early 1990s, Wayne sold the original Apple partnership contract paper, signed in 1976 by Jobs, Wozniak, and himself, for US$500. In 2011, the contract was sold at auction for $1.6 million.”