The Greatest Victory is the one with Least Bloodshed: The Microsoft/Valueact Edition

Even former Microsoft CEO Steve Ballmer noticed a change at his company when ValueAct showed up last April, saying shares were undervalued in part because investors were overlooking Microsoft’s continued success selling many of its software products to corporations. The longtime executive credited ValueAct for helping to change investor sentiment toward Microsoft.

“Maybe starting with the ValueAct investment…there was a wave of, ‘Oh yeah those guys have a phenomenal enterprise business,’” Mr. Ballmer said in a May interview.

The other sea change at Microsoft around ValueAct’s investment was Mr. Ballmer’s surprise retirement, announced a week before ValueAct got on the board. Mr. Ballmer and other Microsoft officials said pressure from ValueAct played no role in his departure.



As measured by market cap impact, it seems Valueact’s Microsoft activism has been the most effective. And they achieved it with minimal heads rolling, minimal/zero glitz/glamour, and minimal/zero Jersey Shore media campaigns. In short, the greatest activist victory (in recent memory), was achieved with the least bloodshed (and fanfare).

I believe it’s safe to say Valueact wants to remain low key, maintain a low profile (except to the extent that further attention will cultivate and bring about culture change in the investment world, specifically but not limited to, shareholder activism).

That being said, it would seem that it will be very difficult (for now) to maintain a low profile:

But its maneuverability appears to have been dented. For most of its history, stock prices of companies it took activist stakes in generally ticked down in the year after the firm disclosed its positions, letting it scoop up more shares for a discount  said ValueAct President and Microsoft board member Mason Morfit. In the last year, the stock prices of its picks have “popped” as other investors mimic ValueAct’s moves. All the attention is “to our chagrin,” Mr. Morfit added.

Here are some ideas:

  • Talk to management teams under assumed names (rather than Valueact’s)
  • Add some serious capital allocation to short selling (probably need to hire someone to lead the charge). This way, it’ll be easier to confuse market participants



Goldman Sachs, Illegal Market Manipulation, and Short Squeezes

In 2011, the U.S. Senate Permanent Subcommittee on Investigations said Salem and other Goldman Sachs traders tried to manipulate prices of derivatives linked to subprime home loans in 2007 for their own benefit. The subcommittee’s assertions were based in part on Salem’s self-evaluation, in which he wrote “we began to encourage the squeeze with plans of getting very short again after the short squeeze caused capitulation of these shorts.”
Goldman Sachs denied any attempted manipulation.
“The translation of that sentence is, you know — is very different than it was, at times, made out to be,” Salem said at the hearing. “There’s no wrongdoing in that sentence.”



Idea Generation: Revisiting Broken Investment Theses (In Celebration of 13Fs)

In 2013, long Yahoo! (“YHOO”) was a big winner for some in the activist/event-oriented world (e.g. Third Point). Yet the long Yahoo! thesis had been around … for quite some time (remember Icahn circa 7 or so years ago?). Recall Greenlight articulated largely the same long Yahoo thesis in 2011…and capitulated in 2011. Long Yahoo! was a broken thesis that transformed into a beautiful thesis.

Microsoft was a perma value play, coming up as a popular long idea in value-oriented conferences, and value circles… but it was ValueAct in 2013 that really got it right.

So perhaps the far more elegant way to use 13Fs are not to follow what other investors have done… but to look for ideas that they give up on, and bet the other way (or examine the merits of doing so). 

Remember Meredith Whitney? Remember all the negative sentiment (rightly so or otherwise) towards her in the last few years, specifically with respect to her munifinance/bond prognostications?

For some reason, this recent @MuniLass* kerfuffle got me thinking that perhaps Whitney’s broken thesis is worth re-examining. From a narrative perspective, it just makes sense –  I’m going to give it 24-36 month to come to fruition, in some form.


* Blessed are those who protect the anonymous. I find her outing troubling… that being said, I once followed her briefly years ago, but unfollowed her because I found her unnecessarily nasty towards others. The disrespect and vitriol I sensed in her words (towards those who have variant views) were notable. Short seller regularly receive far worse than I ever saw her receive, but nearly all short sellers simply ignore the threats, false accusations, etc.

::UPDATED on May 16, 2014 8:45 AM EST::

Perhaps a 50% haircut on WWE is reason enough to revisit its long thesis…

Third Point LLC – Letter to Investors Q1 2014

Mister Pink’s take on the markets…

The Best Remedies Against Executive Excess & Malfeasance = Activist Investors & Shortsellers

Recently, Joe Nocera politely explained how Warren Buffett’s de facto support of Coca Colas’ latest executive compensation plan seemed in stark contrast with Buffett’s past words regarding excessive executive compensation

I’ve written about my mixed feelings regarding Buffett here , and am not surprised Buffett’s words and actions considerably differ. But the purpose of this post is not to criticize Buffett, but to answer the following question Joe Nocera poses at the conclusion of his editorial: “How sad. If Warren Buffett won’t use his unparalleled clout to rein in excessive compensation, how can we expect anyone else to?”


THE ANSWER: The entities that are naturally motivated to ferret out excessive compensation and malfeasance, respectively – Activist investors and Short sellers.

Make no mistake: there is no panacea for human misbehavior. I’m a firm believer in imperfect knowledge, and imperfect understanding. Activist investors and short sellers do not solve all corporate governance-related maladies. But at the very least, they are (in the Churchillian sense) “the least worst” answer. As a result, the public and regulators would be wise to protect and encourage the activities of activist investors and short sellers. Though both are profit seeking entities, there are spillover benefits resulting from their natural activities.

Short European Sovereign Debt , and Treat Yourself to some Currywurst, Tapas, etc. Later

The thought/idea came to mind around a month ago. Spoke recently with someone much more knowledgeable about sovvies he mentioned the idea (someone who knows more about sovereign bonds than I do, and has demonstrated ability to monetize).

Then early this morning started seeing that Spanish bond yields are than Uncle Sam’s! Uh huh. Central Banks are Omnipotent (All-Powerful) and Omniscient (All-knowing)… until the Market saith otherwise. The market will humble the ECB.

Can yields go even lower? Yes. Then what? Short more. I started shorting FaceBomb around 69, added more around 71. I didn’t get the top. Oh well.

About High Frequency Trading (Straight from the Horse’s Mouth)

A high frequency trader’s take on …HFT:

For almost 5 years, I was a trader at GETCO, which was the premiere, dominant HFT firm. They recruited me from MIT and I didn’t know what to expect when I joined the ~100 person company. Lucky for me, I found the work enormously satisfying and can’t imagine a more fun time.

From an intellectual perspective, the problems are as satisfying and difficult as you could find anywhere else. There is as much math, game theory, economics, technology, computer science, and engineering as you want there to be. The technology is cutting edge. HFT is the driver of a lot of technological advances. It also generates and requires a lot of data.

From what I’ve read about different industries, HFT is most like working on Google search: finding signals to predict what users are searching for is similar to finding signals to predict where the market is going. Addressing both problems requires a lot of technological resources, hard thinking, superior software and infrastructure, and intense computational power. Even compared to working at a fast paced tech startup, my impression is that much of the work at many tech startups doesn’t require a lot of deep thinking. Unlike many banking or consulting jobs, in HFT you don’t make power points or talk to clients.

HFT is extremely entrepreneurial because the problem of “make money trading” is ill defined: no one is telling you what to do because there’re many ways to approach the problem and a lot of things to consider. You don’t have to put in face time or wear a suit: it’s all about results. And you can’t fake your results or BS your way through your job- everyone can see how much money you’re making.

Before joining GETCO, I read Liar’s Poker, and I never saw any of that macho, elitist world. Rather than being a BSD, I think trading is about humbleness and curiosity, a willingness to test your ideas and accept the feedback markets give you. It’s human nature to surround yourself with yes-men who validate your ideas, but trading is about testing your best ideas the most and figuring out when they don’t work. The competition and low barrier to entry gives the best ideas a chance to succeed- it’s the most “fair” an environment I could imagine. If your ideas work, then they’ll make money. If they don’t work, then it doesn’t matter how senior or how good a reality distortionist you are- you’ll lose money. Only in HFT does someone right out of undergrad who has no network have the same opportunity as everyone else to be the top trader.

Unlike my friends in academia, who labor over a huge problem for years with no end in sight, HFT gives immediate feedback. Your models are either making money or they’re not. If you fall behind, it’s obvious within weeks, whereas in many other industries it could take years for obsolescence to become clear. I like to see the direct results of my work, and for me being able to test out my ideas quickly is one of the most satisfying parts of HFT. If you’re wrong, then you find out right away and you can test a new theory- you’re not left wondering if what you did matters or not, whether you’re right or wrong: the idea either translated into more money or it didn’t.

Trading is a constant challenge because the changing markets ensures there’s always interesting, hard problems to work on. I find this satisfying because I can get bored easily. I like doing experiments, I like getting results quickly, I like being quantitative and technical, and I like always learning something new. What’s more satisfying than that?

HFT is extremely competitive. As much as high frequency traders like to distinguish themselves from other people in finance, even from other kinds of traders (we’re not click traders or flow traders!  Like anyone outside finance knows the difference…) and view themselves as nerdier and a band apart, the fact is that the entire industry is relatively cutthroat because it’s dealing with huge sums of money and has an industrywide culture of secrecy and competition. Everyone is your direct competitor, sometimes even people within your own company. This can be stressful, but I find it exciting and motivating.

HFT has a bad reputation in the media, unsurprising considering the news is financially incentivized to misinform, generate controversy, and provoke valence emotions such as anger and outrage. Trading is complex and many people don’t know very much about finance but our financial system touches everyone’s lives so it’s often in the media.

As a result, HFT suffers from a complexity valley: if people don’t know anything about it, when they hear about it in passing, they don’t understand it and they don’t think much of it; if people think about it a medium amount and read news articles about it, when they are armchair philosophizing they hate it; when people actively participate in algorithmic trading and electronic markets, they get obsessed with it and want to integrate it with every aspect of their existing trading. Why would you persist in forcing a human to do what humans aren’t the best at doing, namely fast, complex computations, aggregating and analyzing terabytes of data, submitting and processing numerous data feeds simultaneously?

Most important topics fall into the complexity valley category, but because getting to the other side of the valley takes longer than 140 characters, all of politics and many important economic and social problems have degenerated into soundbites designed so that everyone can have an opinion. Who wants to read an article only accessible if you’ve put in your 10,000 hours? Those articles don’t get hits or retweets; it’s easier and more profitable to write something blatantly false or misleading so everyone can dive in with their gut judgment.

When people as esteemed as Mark Cuban and magazines as excellent as the Economist (probably the best magazine out there period) write things that demonstrate how shockingly confused they are about automated trading, I wonder what hope there is for the rest of the world. But in some ways this negative media attention bonds your team because you’re the only ones that understand reality. I try to distance myself from news so I can afford to find bad articles funny instead of infuriating.

The opacity and intense secrecy contributes to making your work unrelatable to most people. This can make for awkward party conversation, either because someone asks you if they should buy gold vs AMZN, or why you caused the flash crash, or why you shrank their grandmother’s pension fund. When most of the world including some of the most educated people with PhDs can’t tell you why the stock market exists or how it’s important to a first world economy, it’s not a surprise that many people can’t tell you what automated market making is or how it helps consumers. When people ask what your work is and you say you’re an algorithmic trader, they already hold an erroneous (I’ve never met someone not in finance who had anywhere near an accurate view of what HFT involves), oftentimes negative, view of the field.

These concerns revolving around relating to other people outside your team, such as being able to explain your work to your mom or tell her how much you’re making, require you to be comfortable doing what you want to do, being self motivated and driven. When you go into finance, some of your friends will joke about selling out, and you have to not particularly care what others think. Otherwise you should be a children’s cancer doctor or something where it’s more glaringly obvious how you’re contributing to the world (assuming you care that people think you’re adding value to the universe).

Something I abstractly consider is the escalating speed race demanding increasingly large costs for infrastructure. Philosophically there could be some question of whether even the most technically advanced naturals care about the difference between 1 vs 2 microseconds. Furthermore, it’s the type of thing that a simple change in exchange microstructure could render irrelevant, so this aspect of the industry could change a lot as the industry evolves and grows. I don’t view this as satisfying or not- it’s just something characteristic of a business as new as HFT for which regulations and best practices are still being created.

Sounds very thoughtful…


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