| If you had a robot that could tell you what stocks would go up, what would you do with it? Here are, I think, the two plausible answers: - Ask the robot what stocks will go up. Buy those stocks with your money. Make money as they go up.
- Start a hedge fund. Ask the robots what stocks will go up. Buy those stocks with your investors' money. Make money for your investors, and charge them 20% of the profits.
The key thing about these answers is that you make money from picking the stocks that go up. Because your robot can pick the stocks that will go up! That's a differentiated robot! Arguably Renaissance Technologies built a robot that tells it what stocks will go up, so it sequentially tried Approach 2 (hedge fund) followed by Approach 1 (make too much money, close hedge fund to outside investors, invest their own money). Both good approaches. Here's this: An Israeli regulator has cleared an artificial intelligence startup to launch a chatbot that offers stock-picking advice in partnership with a large bank, even as other governments have raised alarms that AI might destabilize financial markets if used widely in investing. Tel Aviv-based Bridgewise has been given the green light by the Israel Securities Authority (ISA) to release a chatbot called Bridget later this month that can offer recommendations for which stocks to buy and sell in response to user queries. The startup is working with one of the country's largest banks, Israel Discount Bank, to roll out the product. … The regulator laid down several other conditions for approval, including that the company offering such an AI tool must have an investment license, be compensated on a fixed rate rather than based on how well the investments do, and abide by basic conflict of interest rules.
"Be compensated on a fixed rate rather than based on how well the investments do"? Like, you have a robot that can pick the stocks that will go up, and you … what, charge $1 per question? Founded in 2019, Bridgewise uses AI trained on historical data combined with real-time news to provide investment analysis to brokerages, wealth advisors and exchanges, including the Nasdaq, the London Stock Exchange and the Tel Aviv Stock Exchange. The company said its new chatbot has taken years of work to develop and has gone through significant testing to ensure the advice is accurate.
"To ensure the advice is accurate"? Like … to ensure that the stocks go up? Was the testing "ask it what stocks to buy, then see if they go up"? Or something else? Diamant said the risks in using the AI tool for buying and selling stocks are "similar to any investment decisions a trader makes on advice from any bank or trading entity." When testing the chatbot, its responses included a disclaimer about the service's limitations. "The information is not tailored to you specifically and is not a substitute for personal investment advice," the disclaimer said. Bridgewise is working on updates that include 12-month share price forecasts, earnings call transcripts and helping users build custom themed portfolios based on their preferences.
Right right right, I am being unfair. When you call your actual human broker for advice about what stocks to buy, you don't expect her to tell you the stocks that will go up. You expect her to share research and earnings call transcripts with you, build themed portfolios, that sort of thing. Maybe she'll give you a tip about a stock she likes, but you understand that it won't necessarily work out. You understand that she's a flawed human being answering the phone at your brokerage, and that if she could reliably pick the stocks that go up, she'd be doing something else. That's probably true of the chatbot too: If Bridget could reliably pick the stocks that go up, she'd be working at a hedge fund. Still I feel like it is harder to intuitively understand that the chatbot is a flawed human being like anyone else. Because it isn't. If the chatbot tells you what stocks to buy, you might believe it. One problem that has been solved by modern finance is what I think of as the "accidentally taking delivery of a load of coal" problem. In Wall Street lore, there is a legend that some naive trader, somewhere, sometime, once bought a bunch of coal futures contracts (or pork belly futures, or whatever) for some speculative bet, and then forgot to sell the contracts before they expired. Therefore, he was obligated to take delivery of the coal. He didn't realize that, and one day the doorbell rang at his office and he opened the door and found several tons of coal heaped up in front of the office, and had to figure out where to put it. Hijinks ensued. In modern commodity futures trading this is pretty hard to do. If you buy some commodity futures and they expire and you have to take delivery, what you get, in the first instance, is mostly an electronic certificate saying "here's your nickel," or whatever it is. The nickel itself is in some designated warehouse that has some relationship with the futures exchange. And there was some pile of nickel that your futures counterparty owned, and then you bought the futures contract and it expired and your counterparty delivered the nickel to you, and now you own the nickel. But "you own the nickel" means that the nickel is still in the same pile in the same part of the same warehouse, but there was a little sign over the nickel saying "this nickel belongs to ______" with your counterparty's name written in pencil, and the warehouse people crossed out the counterparty's name and wrote yours instead. You don't have to find a place to put the nickel; the nickel is in the same place it was before you got it. (You probably do have to pay rent to the warehouse though.) And then if you want to get rid of the nickel, you just sell another futures contract, and when it expires you deliver the nickel to the buyer. You don't need a truck for that. The warehouse just crosses out your name and writes down the buyer's name. The nickel never moves; only the financial entitlements do. That's not how all commodity futures settle — coal futures, for instance, largely seem to cash settle against an index of actual coal delivery prices, so you can't get any delivery at all; I spent a certain amount of time yesterday reading about how live cattle futures are physically settled — but this basic idea, that the commodities sit in a warehouse and ownership of them passes back and forth as derivatives traders trade, is pretty standard. I sometimes call it "abstract commodity space": There is nickel that lives in the warehouse and passes back and forth for derivatives trades, and there is nickel that gets turned into cars and batteries. One general thing that you might think about this is that the real-world commodities need to be better than the abstract commodities. If you use bad nickel to make a car, the car might break. If you put bad nickel in a warehouse to serve as a substrate for commodity futures contracts, it doesn't matter much. Last year JPMorgan Chase & Co. found out that some of the nickel it owned in one of these exchange-approved warehouses was actually bags of rocks. The bags of rocks worked fine as nickel, for the purposes of nickel derivatives, for quite some time, until someone accidentally kicked them and noticed they were rocks. If JPMorgan was planning to nickel-plate something with those rocks, it would have run into trouble. But it wasn't. If you are a commodities trader — not, like, JPMorgan, but a company that both uses the commodity in real-world applications and also trades commodity futures to hedge financial risks — you might find yourself dealing a lot in both real, physical commodities and in abstract, warehouse-based commodities. You might move back and forth between them: Sometimes you might sell a lot of futures and deliver some commodities into the abstract warehouses; other times, you might buy futures to take commodities out of the warehouses. This will largely be driven by supply and demand dynamics: If people need to use a lot of nickel now, but future demand for nickel seems weak, you will break some nickel out of the abstract warehouses to turn it into physical objects; if nobody has any need for nickel now, but the future looks bright, you will plop some nickel into the warehouses. But, any time you are doing this, you will probably be mindful of the fact that real-world applications will call for better commodities than abstract warehouse applications. If you have a lot of nickel and want to deliver some into the abstract warehouses, you'll deliver your worst nickel that meets the warehouse standards. If you have a lot of need for nickel and want to take some out of the abstract warehouses, you'll take out the best nickel you can get. Over time, the good stuff will get used in the real world, and the abstract warehouses will have a tendency to fill up with, uh, rocks. I honestly don't know how much difference there is between good and bad nickel, but this is more of a problem with agricultural commodities, which do things like go stale. The Financial Times reported last week: A frantic hunt by chocolate manufacturers for high-grade cocoa has left a backlog of old, poor-quality beans lying in London's warehouses, leading to a rare divergence in prices between the UK and the US. … But the global shortage has led to a race among cocoa bean processors to secure high-quality beans, while shunning older varieties. Stocks of harvested beans are emptying, with US inventories at 15-year low and warehouses in London the lowest since 2021. What is left in London is a "poisoned pill", said Martijn Bron, who was global head of cocoa and chocolate trading for agricultural commodities giant Cargill until 2022. The UK capital has historically been the market for large-scale purchasers of cocoa. But at the end of August more than one-quarter of the 54,650 metric tonnes of cocoa beans held in the London ICE exchange warehouses was more than three years old, according to exchange data. Moreover, almost 80 per cent of this older stock is bulk-stored beans grown in Cameroon, which is widely viewed in the industry as lower quality for making chocolate. "You have this double whammy where a significant amount of these [cocoa] stocks are old and from a non-preferred origin," said Oran van Dort, commodity analyst at Rabobank. "Anyone that ... wants to receive delivery — ie not a speculator — has a high probability of receiving this old, and less favoured cocoa. And you might want to avoid this if you are a chocolate manufacturer," he said. "The consequence is that there is less demand for that London stuff, driving prices down."
Right I mean the absolute best use of the oldest and least delicious chocolate is to serve as raw material for commodities futures contracts rather than chocolate bars. But if you're in the business of turning commodities futures contracts into chocolate bars, you won't want those contracts. Every year, thousands of US public companies hold nonbinding shareholder votes on a handful of symbolic questions. The most important of these is generally "should we re-elect our board of directors," which sounds like it would not be particularly nonbinding or symbolic, though it usually is. Usually nobody is running against the current directors, so even if they don't get a majority of the votes they can keep their jobs. But if there are a lot of no votes, that is symbolically embarrassing. ("At the end of August, there were 35 zombie board directors at 27 US-based Russell 3000 companies," reports the Financial Times, where a "zombie director" is one who "failed to win at least 50 per cent support from shareholders" but stayed on the board.) And then there are other questions, which are often proposed by shareholders and address environmental ("should our company worry more about climate change?"), or social ("should our company try to have more racial diversity," "should our company try to have less racial diversity?") or governance ("should we have a chair of our board who is not also the chief executive officer?") matters. If you are a diversified individual investor who owns hundreds of different stocks, you will get hundreds of proxy statements asking you to vote on perhaps thousands of these questions. You will generally own something less than 0.0001% of each of these companies, so your vote is unlikely to tip the scales on anything. Even if it did, though, it would tip the scales on some nonbinding symbolic vote; it's not like your vote will force the company to do anything. And even if the company did do something in response to the proposal — if it separated its board chair and CEO roles, or became more or less diverse, or even replaced a few directors — it is not immediately clear whether, how much and in what direction that would affect the stock price. Perhaps you could do some research to figure that out, but, again, you're voting on thousands of these questions. For most investors, there is exactly one rational response to all of these proxy statements, which is to throw them away without reading them. Not everyone will do this, however. Some people have a lot of time on their hands and an intense interest in symbolic questions, and they might go and vote all their proxies. If you are passionately committed to making public companies more diverse, or less diverse, perhaps it will be worth your while to vote on thousands of shareholder resolutions at hundreds of shareholder meetings. (After all, some shareholder went and wrote each of those shareholder proposals, and those shareholders probably weren't motivated by rational economic calculation either.) But that's not a matter of investing; that's activism, or a hobby. (Meanwhile, every year, a few companies will hold binding votes on economically material questions. The most important of these is usually "should we do this merger," though there are also sometimes contested elections for the board of directors ("proxy fights") where the two different slates have different strategic visions for how the company should be run. And "should we be allowed to issue more stock?" is also a surprisingly common, surprisingly important question put to binding shareholder votes. It might be more rational for individual shareholders to vote on these questions, though they frequently don't, which can cause trouble for companies with a lot of retail shareholders.) Most normal diversified individual investors these days, though, don't own hundreds of different stocks, not directly. They just own mutual funds, index funds or exchange-traded funds. Those funds own the shares of hundreds of different companies, and those funds' managers vote on all of these questions. This is a good division of labor because these votes almost never matter, economically, to the ultimate investors. Meanwhile the funds' managers have a fiduciary obligation to vote in some reasonable way, and they have some economies of scale in voting. Do the fund managers vote in a way that is in the best interests of the individual investors in the funds? I think the rough answer is: - It doesn't matter; these are mostly nonbinding symbolic votes with limited economic impact.
- Yes, probably: They have fiduciary duties, they have governance teams that think about these questions, and they do the best job they can to maximize the value of their portfolio on behalf of their individual investors, including in shareholder voting. I'm sure they get some calls wrong — they vote to re-elect a director who is a bad director, or they vote against a nonbinding proposal to ask for a report on carbon emissions that would actually improve the company's performance — and there is at least one SEC enforcement action against a mutual fund manager who voted its shares too lazily. But, in the aggregate, they are trying to do a good job, and they are doing a good enough job, taking into account Point 1, which is that none of this matters very much.
- On the other hand if you are an individual investor who cares about these nonbinding symbolic proposals as a matter of activism, or as a hobby, you will probably be dissatisfied with how your fund manager votes, at least some of the time.
There are two possible solutions to the problem in Point 3. One is to have a bunch of different fund managers with differing voting philosophies, who advertise those philosophies to investors to try to attract the ones who share them. And in fact there are socially responsible investing funds that try to attract customers by voting in favor of diversity proposals, and anti-woke funds that try to attract customers by voting against them. There are problems with this approach, though. First, the investors you attract this way — the ones who care a lot about these nonbinding symbolic proposals — probably won't share your philosophy exactly, and they'll get mad at you if your environmentally responsible fund votes in favor of directors at a coal company or whatever. Second, you will attract very few investors this way, because most individual investors rationally do not care about how their shares are voted on nonbinding symbolic shareholder proposals. The other solution is to just give the ultimate investors in the mutual fund the option to vote their shares themselves, or at least some menu of voting approaches, so that (1) almost everyone doesn't have to worry about it and (2) anyone who does want to worry about it can get what they want. The strongest flavor of this is called "pass-through voting," and you would expect that any mutual fund that implemented it would find that almost all of its customers reply "I don't care" and then a few get pretty into it. Anyway: About 40,000 individual investors in Vanguard Group's index-tracking funds participated in a pilot program that allowed them to make their viewpoints known on important issues facing shareholders. ... John Galloway, Vanguard's global head of investment stewardship, said the program has succeeded in giving clients a voice in the voting process. The firm plans to add more US equity index funds over time, so that more individual investors can "align their investment portfolios with their personal preferences," he said. … In the pilot, investors were given four options: They could vote in accordance with what the companies' boards are recommending; they could support what Vanguard's stewardship team is advocating; they could decide not to vote at all; or they could back Glass Lewis's stance on environmental, social and governance shareholder resolutions. Vanguard said Tuesday that 30% of the 40,000 investors opted to stick with the companies' recommendations, 43% went with Vanguard's team, 2% decided not to vote and 24% aligned their voting with Glass Lewis.
And: "It is a data-driven answer to the question that some have raised about, 'What do investors actually want?' and 'Is it appropriate that the asset manager is picking how their shares are voted?'," said John Galloway, global head of investment stewardship at Pennsylvania-based Vanguard, who heads the proxy pilot programme. The data shows that for many investors, "that seems totally appropriate because they are choosing to pick that same policy".
It is a modest program in that it gives investors three "let a professional vote my shares for me" choices (with the professionals being Vanguard, Glass Lewis or company management) and one "don't vote my shares at all" option. A more ambitious program would have more options, like "let me vote my own shares individually on each question," for the people who are really into it, or "let a celebrity vote my shares for me," for pure marketing. That's a good idea, someone should do that, you pay like Ryan Reynolds and Taylor Swift and Jordan Peterson and Oprah Winfrey to go through all the proxies in proxy season and decide how to vote, and then you market to investors "vote your shares the way Taylor Swift tells you to." Actually never mind, I doubt you could pay them enough to do this. Because it's not very valuable! We have talked a bunch of times about Hunterbrook, the hedge fund that is also a newspaper, but I worry that that's the wrong model for what Hunterbrook is. Arguably Hunterbrook is better viewed as a class-action firm that is also a hedge fund. Like: - You find a company that you think is doing something bad.
- You line up some people to sue the company for doing the bad thing.
- You also short the stock.
- Then you announce your lawsuit against the company, which drives the stock down, making you a profit on your short.
- Also maybe you win the lawsuit.
The essential question is: What is the best way to make money from finding out bad stuff about a company? Shorting the stock is the most traditional approach, but it is risky and uncertain and makes people mad at you and ties up a lot of capital. In the US, finding plaintiffs for a consumer class action lawsuit is a potentially very lucrative way to monetize bad stuff about a company. Finding plaintiffs for a securities class action — not "you did a bad thing to me," but rather "you did a bad thing to someone else, which caused your stock to drop, and I am a shareholder" — is also pretty common. Filing a whistleblower complaint with the US Securities and Exchange Commission can also be pretty good; the SEC pays big bounties to whistleblowers. You don't have to choose, though; you can do all of those things. Find out the bad thing, short the stock, file the whistleblower complaint, announce a consumer class action, and then, if the stock drops on the announcement, (1) take some profits on your short and (2) also file the shareholder class action. Use every part of the bad news. Anyway here's yesterday's Hunterbrook report about "excessive frame flex" in Winnebago Industries Inc. recreational vehicles. "The alleged issue is a defect that occurs when an RV's frame, designed to be flexible enough to absorb road shocks, bends beyond its intended limits and separates from the trailer's body." Sounds bad, if true. How do you make money off of it? Based on Hunterbrook Media's reporting, Hunterbrook Capital is short Winnebago Industries (NYSE: $WGO) and LCI Industries (NYSE: $LCII) at the time of publication. Positions may change at any time. Hunterbrook Media has partnered with litigation firms exploring a potential class action lawsuit based on our reporting. If you have experienced frame failure, we invite you to share your story. …
The stock closed down 2.3% yesterday. It's something, but it's not a huge payday for all that reporting. But it's pretty easy to turn that report into a class action complaint, if they get any emails from people with frame failure. And maybe that turns into money. And if it does — or even if it doesn't — maybe the stock drop is enough for a securities fraud lawsuit. And then you're in business. The broader point here is that these activities traditionally have different business models but similar work products: - Investigative journalism.
- Short selling.
- Class-action lawyering.
- Whistleblowing.
And so you can combine any of them, and probably you should, unless perhaps you feel constrained by journalistic and/or legal ethics. We have talked about how traditional activist short sellers have gotten into the whistleblowing business too: It is less risky and capital-intensive than short selling, and makes use of the same work. And an insider-trading question I get from readers occasionally is "if I am planning to sue a company, can I short the stock first, to make money when the lawsuit is announced?" I mean, not legal advice, but Hunterbrook's answer is obviously "yes." The Commercial-Property Market Is Coming Back to Life. The Rate Cut Won't Save These Real-Estate Owners. Italy's UniCredit Trades Blows With Berlin Over Commerzbank. Lenders Line Up Over €10 Billion for Sanofi Health Unit Buyout. Fortress, Goldman Seek to Tap the Wealthy for New Debt REITs. Caroline Ellison, Star FTX Witness Turned Romance Novelist, Learns Her Fate. Avoiding Apocalyptic Satellite Crashes Comes Down to China Checking Its Email. Top Economist in China Vanishes After Private WeChat Comments. Comedian John Mulaney brutally roasts SF techies at Dreamforce. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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