Welcome to the jungle
Photo by Steve Gale on Unsplash
We live in the age of the influencer.
For a long time, these mythical creatures have congregated around obscure niches that might seem trivial to highfalutin fund managers and venture capitalists. Gaming, fashion, health and beauty are all big businesses, but they are traditional B2C sectors that have always relied on personal recommendations. Everyone knows the viral coefficient is key when you’re selling ripped jeans and hypoallergenic cosmetics.
But finance is a serious business, governed by institutional relationships, counterparty risk assessments, long lunches and undocumented quid pro quos. Legitimacy stems from traditional centres of authority – regulated institutions in London, NYC and Singapore. Instagram and Twitter have absolutely nothing to do with distributing complex financial products, right?
Wrong.
A serious business.
We spend a lot of time thinking about influence and trying to get under the skin of the dynamic by which people affect people. Influencing has gone from a part-time gig to a full-blown industry, complete with a full raft of service providers, consultants and digital platforms. As the eyeballs and clicks pour in, so does the cash.
Finance remains relationship driven and always will, but it’s becoming increasingly shaped by the mechanics of influence. And nowhere is this more apparent than #fintwit, the weird and not always wonderful carousel in which influence is originated, distributed and ultimately monetised with breath-taking vigour. The gossip, conjecture and sycophancy that reverberates around Twitter every millisecond of every day distracts from something far more profound and interesting. It’s not what people are saying that matters, it’s how they are saying it, to whom they are saying different variations of what they want to say, and how they are listening (and reacting) to the arguments and ideas of others. In fact, having seen the almost exponential rise of Reddit’s r/wallstreetbets/ over the past year, the sheer idiocy of trends that emerge from there are unparalleled and its effect on broader financial markets is incredible to witness. New retail investors along with anonymous and unregulated advisors on the platform compete for clout through who can post the most incredible returns through outlandish option contracts with risk levels professional traders would never dream of. This translates into an emergent class of investors armed with little knowledge and, at least for the first half of this year empowered by stimulus checks courtesy of the US government soon to be blown on $TSLA calls and puts or whatever else is in favour that day.
For the first time in history, we have the technology at our fingertips to originate and distribute trust at scale. One person can command an army of followers from their mobile. And in an increasingly globalised industry like finance (think DeFi rather than heavily regulated and localised “traditional” assets), huge rewards await those who can move others to action.
The mechanics of influence.
The nuts and bolts of online influence formation fascinate us, as the process by which individuals accrue and spend trust appears to be entirely formulaic and predictable. Without simplifying a complex dynamic too much, it goes something like this:
A smart/funny/outrageous/progressive leader starts creating content in an ultra-specific niche and sharing it via social media. It’s a lonely, noble undertaking, albeit with a hugely favourable risk profile (unlimited upside with almost zero downside).
A group of equally smart – but slightly less forward thinking – disciples congregates around the leader, drawing legitimacy and social status from the host by passionately evangelising for the niche.
As the tribe grows over time, early disciples are rewarded with elevated status and influence – this can happen very quickly, with superstars created in days rather than years.
A recognisable language (both vocabulary and syntax) emerges, the use of which reinforces assimilation into the tribe. Groupthink takes hold, the filter bubble solidifies, and the rebels become conventionalists. The mainstream media gets hold of the narrative and the leader makes the cover of a revered but laughably slow-on-the-uptake magazine.
At some stage, a progressive individual or faction breaks away from the niche to form a somewhat radical sub-niche (often defining itself through opposition to the parent ideology) and the process repeats. And repeats. And repeats.
The way influence is originated and distributed online is self-replicating, creating a feedback loop that echoes throughout social media and the wider internet. We’re by no means above the process. Indeed, by eavesdropping on conversations and contributing to the algorithmic promotion of content, we are fuelling the process by which communities and ideologies are constructed, mutated and promulgated. But we try to take it all with a pinch of salt. After all, this is a world where truth is subjective; just like your local charity shop, there really is something for everyone, provided you’re willing to dig through enough junk.
Predicting the future.
Why do we care about influence? Because it’s inevitable and unstoppable. And that inevitability means it can, to a degree, be predicted.
We are yet to codify this process in forensic detail (and we’re not even sure it can be systematised, as like all art forms, it resists interrogation), but the basic approach is to embed ourselves into social media sub-niches and observe the behaviours of the tribe as it coalesces and matures. We are then in a position to front-run trends before they go mainstream and the best trails are skied out. It’s a bit like buying a stock before the main brokers start covering it. Within the DeFi space, for example, the mood and sentiment of the narratives on fintwit clearly map ex-ante pretty closely to the near-term prospective price action in the actual assets, volatile as they can be.
This strategy might sound cynical, but it honestly isn’t. We’re genuinely interested in a wide range of obscure topics and committed to learning through listening to what unconventional people have to say about them. Rather than getting our information second-hand via “experts” in the mainstream media we prefer to go straight to the source and apply our own filters. We like to think of ourselves interpreters working with primary texts rather than relying on the translations of others.
Many fund managers are leveraging social media and sentiment analysis to drive returns but attempts at this have tended to evolve around high-speed information arbitrage. Our approach is slower, less mechanised, more thoughtful, and it’s one that’s working well for us.
Enigmatic strangers.
Influencers have always been important. But something has changed. Influence has been decentralised, truth has been subjectified, and it’s becoming harder to know who to follow and who to believe.
When using social media we look to different people for different things. We follow the likes of Patrick O’Shaughnessy, Josh Wolfe and Demetri Kofinas when we want to be educated and challenged to think strategically about established disciplines such as investment management, private markets and geopolitics. At the same time, we follow enigmatic strangers who hold themselves out as subject matter experts when we want to understand the vagaries of trend formation in nascent areas such as DeFi, the metaverse and AI.
At all times we seek to employ a healthy dose of scepticism to challenge and scrutinise claims, ultimately seeking to understand how emerging narratives might drive price action in individual stocks and entire sectors.
Welcome to the jungle.
We believe there is a long way to go when it comes to leveraging content in order to generate returns. The investment industry is changing; the revered gatekeepers of old are falling away, their hegemony eroded by decentralised forms of communication and exchange that enable investors to access multiple information sources and ways of transacting. The oft-bemoaned lack of alignment between banks and their research clients has been exposed, regulatory restrictions have neutered the power of storytelling, and sell-side talent is pouring out of the industry as it evolves towards a more streamlined and automated model.
Online influence isn’t a by-product of this movement; it’s a root cause. When information becomes more abundant, it’s value falls, and it becomes harder to monetise. In the place of commoditised facts and figures emerge strongly argued opinions and passionate recommendations from influential people. And when the process of creative destruction has finally burnt out, the financial industry that emerges from the ashes will be unrecognisable – and all the more beautiful for it.