2021-02-19

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%.