Do you work in Venture Capital? I need a reviewer for a long upcoming post. Email me for details.

The Byrne Hobart Portfolio

Alternative title: Byrne Hobart is 64x better than the average hedge fund.

On December 14, Byrne wrote: “Disclosure: I’m long a small amount of FireEye now that I understand it a bit better. 300,000 customers and 400 of the Fortune 500 is a large addressable market.”

Then this happened:

Over the next 7 days, Byrne’s investment shot up 66%. If this trade was representative of a typical week, it would indicate annual returns of 305,439,776,880%. Starting 2020 with $1, he would be the richest man in the world by the end of the year, and 50 times richer than Jeff Bezos by today.

Interested in whether this performance was typical, I searched back issues of his newsletter for “disclosure”, wrote down every ticker that Byrne claims a stake in, and inferred his annualized returns.

None of this is financial advice, either on my part or on Byrne’s. All returns are an approximation, not intended to reflect Byrne Hobart’s personal earnings. Data is available here.

Results:

  • I estimate annualized returns of 478.5% for Byrne’s portfolio
  • In contrast, hedge funds average around 7.5% (Reuters, Investopedia)
  • The S&P has returned 9.81% annually since 1994, 14.4% in 2020, and 16.7% the last 12 months, and 77.6% annualized since the March 2020 bottom
  • Not including Bitcoin, Byrne’s annualized returns are down to 84.2%

Qualifications:

  • Disclosures in The Diff do not represent Byrne’s entire portfolio
  • He sometimes says stuff like “i’m long a bit”, but I just weigh everything evenly
  • I assume he bought on the date the ticker was first mentioned, and has not sold
  • All “current prices” are from around 3pm ET on 2021/02/16
  • I interpret “Brazilian equities” as EWZ
  • I interpret “hertz puts” as a short on Hertz
  • I interpret every long as simple stock ownership
  • I interpret every short as simply an inverse long

Thanks to Byrne for reviewing a draft of this post. He writes:

I’m ok with it as long as you point out that I’m definitely not writing an investment-advice newsletter, and that the returns are an approximation.

Appendix: Modern Portfolio Theory, or Why This Isn’t Investment Advice

Byrne Hobart writes “I own shares of TSM”. He insists this is not investment advice, but why not? Byrne is smart, and knows much more about finance than (presumably) you or I. Why not mimic his portfolio?

Just as truth is dependent on context and purpose, investments are dependent on your portfolio and risk tolerance.

Do you believe in TSM because you’re bullish on the semiconductor market as a whole? If so, why take on exposure to east asian geopolitics as well? Instead of investing in TSM, you would be better off with a diversified portfolio of top semiconductor fabs and designers, or better yet, a professionally designed ETF.

Alternatively, do you believe in TSM because you think they’ll perform well relative to competitors, but don’t have an opinion on the semiconductor industry as a whole? If so, you should hedge by shorting Intel.

Or perhaps you think TSM is likely to do well, absent some catastrophic risk such as Taiwan being destroyed by an earthquake. In that case, you can use various techniques to remain long while benefiting from extreme volatility.

Okay, but say you don’t care about any of this, you just want a hot stock tip, and as the resident smart finance person, Byrne is in as good a position as anyone to provide it.

If so, you’re still not getting it. The point of MPT is that there is no such thing as “stock tip”. From Wikipedia: “[MPT’s] key insight is that an asset’s risk and return should not be assessed by itself, but by how it contributes to a portfolio’s overall risk and return”. Or at greater length from Markowitz’s 1959 monograph:

This illustrates a basic principle: the security which is risky or conservative, appropriate or inappropriate, for one portfolio may be the opposite for another. One must think of selecting a portfolio as a whole, not securities per se (114)

This is all to say that “long TSM” does not mean that you should go out and buy shares.

Disclosure: I’m long TSM.

FAQ

Peter Thiel once warned me about this kind of indefinite optimism! Plus, I heard index funds are communist.
You know what’s absolutely not definite optimism? Taking stock tips from strangers on the internet. If you want to bet on something, bet on yourself.

The “communism” thing is about (supposed) negative externalities. You are personally better off just buying index funds instead of financially martyring yourself in the name of allocative efficiency.

Isn’t this all selection bias? There are lots of people on the internet, but relatively few hedge funds. Plus, maybe you’re still waiting until his returns look good to write this.
Byrne is the only finance person I follow. His newsletter is ranked #2 in Substack’s Technology section, so it’s not like he’s a random internet person. I first thought about conducting this analysis on Wednesday, then finished it this morning.

Having said that: if I hadn’t found out that Byrne was up a hilariously high amount, I probably would not have published.

So it’s not selection bias for me, but it might be for you!

Why does he even write the disclosures if it’s not advice?
Byrne writes:

I’d emphasize that my writing is not investment advice, that I don’t trade everything I write about (at all!) or write about everything I own/short, and that when I’m disclosing it’s meant to show that I have a financial interest might color my views, not that I’m specifically endorsing something as an investment. For small companies, I generally have to make the decision about whether it’s more interesting to trade it or to own it; I would feel uncomfortable writing up a microcap stock I owned, because I would potentially move the stock price. Meanwhile, gold is one of the most liquid assets in the world, so it’s not like my newsletter would affect its valuation at all.

Bonus

  • Not including Byrne’s short positions, he would be up 723%. Of 5 short positions listed, 4 are way down. The only exception is Hertz, except even there he writes “I did lose money on the Hertz options position, because the implied volatility I paid for was so high.”
  • While searching back issues, I came across this great line: “Disclosure: I am long Bitcoin, and occasionally sell a little for diversification purposes. I’m also long some gold, which I have not had to sell for diversification purposes.”
  • If you’ve made it this far, you’ll probably enjoy this Byrne Hobart fan fiction.

[Edit 02/28/2021]: An earlier version read:

The S&P has returned 9.81% annually since 1994, 14.4% in 2020, and 16.7% the last 12 months, and 113.7% annualized since the May 2020 bottom

This was a msitake. The bottom was in March 2020, giving annualized returns of 76.6%, not 113.7%.

The Irony of "Progress Studies"

The term “nominative determinism” captures the idea that name is destiny. Storm Field is the real given name of a meteorologist, Igor Judge the real name of a justice. As Peter Thiel once put it, “the names of companies are often very predictive of future failure or success.”

I favor the contrary hypothesis: nominative anti-determinism. Uber Express is the slowest of their offerings, Operation Iraqi Freedom was a violation of sovereignty. This occurs not by coincidence, but as the result of desperate overcompensation. As John Searle once put it, “anything that calls itself ‘science’ probably isn’t”

Viewed through this lens, we can finally understand what Progress Studies is actually about. It is neither a real field of study, nor is it about progress. Instead, it’s proponents have been mired in a fixation on the past.

Patrick Hsu says his biggest dream is to build the Bell Labs of biomedical research. Adam Marbelstone, new Manhattan Projects. The Mercatus Center wants to know: “What’s Your Moonshot?”

Why do the ostensible leaders in innovation insist on defining themselves by the glories of past generations?

I don’t know how Robert Oppenheimer conceived of the actual Manhattan Project, but I’ll bet it was not “the transcontinental railroad of nuclear weapons”


Frequently Proposed Answers

We haven’t accomplished anything since 1970.
Whether or not there is a stagnation of some sort, it would be absurd to suggest we haven’t had any successes. We got a rover on mars, developed genome editing, nuclear power plants, vaccines and cell phones.

Jason Crawford suggests the accomplishments just haven’t not been as visible, or as unambiguous. There was no parade for quantum supremacy. No one is building the Human Genome Project for X.

It was all war funding, and war-time immigrants.
Per Nintil, we may want to get more specific.

The Manhattan Project was undertaken to win WWII. The Apollo Program was meant to win the Cold War. Both were powered by immigrant scientists, (Leo Szilard, Enrico Fermi, Edward Teller, von Braun [1]). There is no such confluence of funding, urgency and talent aggregation today, and we are in need of a scientific equivalent of war.

As for Bell Labs, it seems to be the result of a momentary void in alternative sources of research funding. We might be accomplishing just as much today, but spread out across dozens of universities, and without the same concentration of talent.

There’s a 50 year lag before we’re allowed to experience nostalgia.
Even in 2013 Google was branding X as a “moonshot factory“ and it’s Chief Executive as “Captain of Moonshots“. So at best it is a 44 year lag.

I would be shocked if in another few years we start glorifying accomplishments from the 1970s that were previously ignored


Footnotes
[1] Of course von Braun was less of a refugee and more of a surrendered nazi, but his presence in the US was a product of the war all the same.

Highlights from the Comments on Organizing Research

See also No Revival for the Industrial Research Lab, Notes on Adam Marblestone’s Focused Research Organizations, and Is There a Translational Research Gap?.

More anecdotally, see Bus Factor 1, The Murder of Wilbur Wright and Highlights from the Emails on Golden Handcuffs.

All emphasis mine, some of these are several comments or emails grafted together, with minor omissions. Commentary at the bottom.

Adam Marblestone

One comment is actually I agree a lot of effort is going to “bridging the valley of death”.

I actually think FROs have a major, perhaps primary, purpose outside of that “translational” aspect. Even to develop tools for basic research, or public good — things that are never going to “graduate” to become startups —you may need to structure some efforts in a more “fast and focused”, team based, systems engineering heavy way than academia allows. Example: faster cheaper better brain mapping… not a startup, but needs a systems-focused non-academic team to get it up and running.

Thus, the Day One article which mentions “basic research” challenges that require FROs rather than “valley of death” may be a better motivation. The Twitter reply to Sarah is actually a kind of perversion of the main idea, therefore, massaging it to be more about valley of death per se than it need be.

….Picking the right problems is key, as is having metrics of progress but without letting that over determine the effort / prevent any pivoting on the way to the goal.

Many problems won’t be a good fit for them.

So yeah, I appreciate your pointing out that this is just one experiment that needs to be matched to specific rare problems that fit it, and not meant to replace the whole system.

That said, I think some of the problems they address — given that academia and startups are big enterprises already — could be “long poles in the tent” in some areas. In other words our R&D system is only as strong as the weakest element and if FROs can solve for some rare weak elements that could have a big impact overall.

Also there can be a notion of users, just scientific users not always VC grade giant commercial markets

Sarah Constantin

I think a handful of funds existing is good validation of the idea rather than evidence it’s already overdone. The gap is probably big even if these guys are doing everything right.

….btw, I should just say, I try a little to be right on Twitter, but I’ve never been interested in doing social science as an intellectual endeavor.  I’m glad some people are doing it, but I take my verbal activity way less seriously than that.

Nathan Taylor

Bell Labs was created as a defense against monopoly due to Bell risk of antitrust enforcement. As a public utility getting monopoly profits, Bell viewed itself as a public institution which could invest in basic R&D which might not impact the bottom line.  The clear parallel here is Google Lab moonshots. Again, a tech monopoly wants to showcase its virtues, and use its monopoly profits to invest in blue sky work. And Sun and XEROX PARC, just like Bell Labs, never really got return for their most important inventions. They became public goods, which new tech companies picked up and ran with. Or, given that basic research is so hard, the most common result is something like google glasses.

My point here is that Industrial Research Labs which we (historically) love are the product of tech monopolies tossing money around to make themselves feel good about their public service. And avoid risk of antitrust. They should arguably be funded by the company as a marketing expense. The people hired of course are good and sometimes produce incredible results.  But the benefits go to other companies than the ones who did the research. To use Bell Labs as a model we want to recreate without realizing it’s a product of monopoly profits, which had very little chance of benefiting the funding company itself, is to misunderstand what happened.

Bell Labs wasn’t murdered. It was a quirky exception vanity project which randomly produced large public benefits, while be of little or no use to Bell itself. It was never going to survive long, because it was a weird, quirky contingent exception. Trying to make more Bells Labs is a bad idea, because it’s not reproducible. Of course I may be wrong about this position about corporate research labs. And I’m exaggerating a bit to make the point. But I think this view is broadly defensible.

Where does that leave us? I think government funding for prizes (longitude and watches), or guaranteeing payment if tech pays off (mRNA vaccines) is a very sustainable way to go to push tech forward. Government leadership on picking where to invest, with large amounts of money going to companies, who only get paid if what they tried works. Otherwise the companies get nothing.

The result we want is technology with large public goods benefits. Well done government funding is a far better aligned way to create tech public goods than corporations.

Commentary
Adam’s “tent” metaphor is a useful alternative to thinking about one-dimensional gaps. Some technologies (including mRNA vaccines) require support over a path across the research space, so it’s not enough to have each individual discovery funding if you cannot do the “systems building” Adam talks about.

Sarah is maybe right about translational research, though given that Breakout Labs is a for-profit VC and 11 years old, I would expect it to scale up if the returns are actually good. Financial returns are an imperfect proxy for scientific ones, and as mentioned last time, 11 years might not be enough time to find out if the project was a success.

Nathan makes some good points, though I’m not sure Bell Labs was as quirky as he imagines. As I understand it, the lab was quite successful for multiple decades. At the very least, around 1940-1970.

As aggravating as it can be to see corporations waste money on vanity projects, there are reasons to avoid too much government funding, even when it’s well directed.

There’s some story in which:

  • Bell Labs hires the world’s brightest minds, they do the best science anyone has ever done
  • The government steps in and scales up the university system
  • Universities now have the world’s brightest minds
  • Universities are only accountable to bureaucratic funding, they become arbitrarily corrupt
  • Meanwhile, it’s hard to launch a new private lab because the talent is tied up, and universities are already pumping out incremental research
  • We end up in a stable equilibrium with no mechanism to fund “transformative research

This is at least somewhat true, but I don’t know if it’s the most important truth.

I don’t know if “transformative research” is the right thing to aim for, if it is a thing at all, or if it’s even underfunded. Certainly, the NSF is eager to fund transformative research, whatever it is, so maybe it’s all fine.

On the other hand, I still get emails from people who say they stayed at Google for the paycheck, stability and prestige, even though they didn’t believe in the work. So certainly there is something wrong here, and some human talent is being squandered.


As a side note, this all leaves me with even less interest in Twitter. I thought the original thread was interesting and provocative, but found it less important the more I learned on my own. After contacting the people involved, Adam admits “The Twitter reply to Sarah is actually a kind of perversion of the main idea, therefore, massaging it to be more about valley of death per se than it need be.” and Sarah writes “I try a little to be right on Twitter, but I’ve never been interested in doing social science as an intellectual endeavor.  I’m glad some people are doing it, but I take my verbal activity way less seriously than that.”

Again, this is no one’s fault. Adam and Sarah are two of the smartest people I know, and neither is acting poorly here. They’re just doing what you’re supposed to do, which is to be relevant and engaging.

And still, neither of their stated aims is to use Twitter as a place for substantive and rigorous discourse. You may think that’s what you’re reading, but you are wrong. At best, it is a place to post links to other places.