LAWS OF HYPE
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"Without promotion something terrible happens...nothing!" -P.T. Barnum

Laws: Table of Contents

Law #10: Spoon Feed the Sell Side

2/20/2015

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Take advantage of the sell side’s feeble minds and group think. Spoon feed them whatever talking points you want parroted to the broader investment community.

This Law should be used in conjunction with Law #5 (Emphasize Meaningless Metrics) and Law #6 (Obscure Data), but is important as a standalone Law given the massive tool the Sell Side can be for your Hype Campaign. 

The Sell Side needs context.  First, they are very insecure people and more akin to an aspiring groupie who might not have found their group yet than an objective researcher of facts.  You need to court them.

Always tell them “great  question” or “really appreciate the question, I’m glad you brought that up” when they ask a question on a conference call, especially if it’s the most bone-headed question you could think of asking.  This will make them think you like them, and they will immediately, subconsciously, begin taking in only the good things you are saying and ignoring the bad (or ignoring what you’ve omitted…as you know from Law #8, you never show weakness on a conference call).  Try to speak to each question at length, even if you stop addressing the original question (see Law #15: Give Non-answer Answers, e.g. ramble).  This not only makes the analyst feel important again, but also gives you another chance to wax philosophical on the disruptive nature of your business and rapidly growing massive TAM.

Understand the sell-side spend most of their days on the phone, talking to their clients, trying to pitch their top long ideas.  They do not have time for a complicated story, and certainly don’t have time to think how to distill a complex story to simpler story. Make their lives easy for them.   

This is most easily accomplished by feeding them data points that sound impressive and achievable at first glance, and can be packaged as digestible sound bites for the sell side to put in their reports and parrot to their clients.  Sometimes the spoon-feeding and parroting can be for simpler items, such as Go-Pro calling their cameras “happiness inducing, universe altering, life capture devices”—no one history has used such a term for a camera. To give you a sense of the level of mindless and absolute parroting by the sell-side word-for-word, many sell side reports will also refer to Go-Pro’s camera as life-capture devices (see Law #22: Bedeck the Banal).

An even better example of this recently is IACI’s Greg Blatt, who oversees The Match Group dating websites Match.com, OKcupid, and Tinder.  Tinder is IACI’s “hot asset” and the “story” behind the stock, even though it is not making any revenue yet and Greg refuses to even give users counts (which would be the standard fluff metric to at least provide:  MAUs and DAUs).  Instead, Greg leaks that Tinder produces a “billion swipes” a day (with Tinder, you either swipe your phone left or right to indicate whether you like a dating profile.)  It is hard to argue with a billion, even though it does not really even say anything about how many people are using it, how that might help it make revenue, or even how many more swipes that was compared to a few months ago.

Blatt then expertly framed Tinder’s revenue/EBITDA generation capability by laying out the following statement on an earnings call (Q2 2014 call):

"If you took Tinder's current user base -- so June, 2014. And, you monetized its North American and European users at the rate that we monetize on OkCupid, and we monetized Tinder's users in the rest of the world at 25% that rate, you would be looking at about $75 million of additional EBITDA this year."


The brilliance of this statement are several fold.  First, he starts with a data point we do not have and he will not provide (Tinder’s current user base), making it impossible for a discerning mind to even start proving or disproving what he is saying (Law #7 Give Un-falsifiable Forecast, increase dependence of your investment thesis on far-off forecasts).  Second, he sets forth a simple (and even conservative) sounding framework for monetization by comparing Tinder to OKCupid, another dating website they have been attempting to monetize the last 4 years.  Finally, he comes up with a large EBITDA number that, if one has already drank his Kool-aid, they may misconstrue as guidance rather than just a hypothetical. This methodology also plays into investors’ natural tendency towards a Saliency Bias, which causes them to be overly influenced by (false) analogy to memorable success (similar to Law #21: Compare Apples to Oranges).

It does not matter that monetizing Tinder at the same rate as OKCupid will be a massive, unachievable Herculean feat. After four years of working desperately to monetize OKCupid IACI is only getting it to about 20% of the level of Match.com, and OKCupid is closer to Match than Tinder is to OKCupid.  It also does not matter how he is thinking about defining EBITDA, as in the same breath just one sentence later in the call Greg claims Tinder is massively hurting Match Group’s profitability as a way to explain the group missing estimates. No nevermind this, as he assures us Tinder will generate 50% EBITDA margins, well above Match Group, and thus will be accretive soon enough.

The only thing that matters in this case is that he has spoon fed the Sell Side an easy way to pitch the stock:  “1 billion swipes, think about that” and “They are actually being conservative and assuming Tinder doesn’t even monetize as well as OKCupid internationally.”  Furthermore, because it was a hypothetical, he can get people excited and shift focus well into the future about something intangible while simultaneously slowly lowering near term expectations. 

This has already happened with IACI, as Tinder has delayed their original monetization plans by at least six months (and counting) while adding unexpected “scaling costs”.  No matter, the eventual vision (whenever it gets there, whether it’s 2016 or 2020) is firmly part of the Match Group conseneus mythology and consensus estimates.

You may think this is overstating things: that people whose lives should depend on being skeptical of abstract goals would not blindly begin forecasting off fluffy hypotheticals, but that is not the case. It is important to reiterate the psychological and professional pressure these people are under…they wwant to find the story with least resistance. They know that other sell side analysts will latch onto the same comments and are terrified of straying from the herd.  Even if the herd is wrong, they will be wrong collectively, they can blame management, and the chance or getting fired will decrease.  Similar to the notion that you “don’t get fired for buying IBM,” do not underestimate the notions of self-preservation and misery loving company. 

It’s usually safer to shoot first and ask questions later when a CEO lays out a grand vision, as the stock could rip past your 18-month price target in a few hours. Whether you are the Bank of America Merrill Lynch analyst who literally plugged in the $75 million EBITDA Blatt referenced into his model for 2015 with no explanation, or the Oppenheimer analyst who took his OKCupid metrics and applied them to Tinder to find a way to raise his estimates and price target, it’s better to latch onto management commentary and be wrong then to fall behind and miss the “big move.”  Understand the psychology of the Sell Side, and exploit it mercilessly to propel your Hype Campaign.

An additional and obvious point to make is that the sell-side mostly exists as the chief propagandists for the parent company investment bank to sell equity and debt securities and milk the fees from companies that are reliant on the generosity of strangers to fund their cash burn. The Law of Hype Corollary  to this law is Law #19: Befriend the Bankers: Maximize the number of investment banks covering your stock. 





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Law #9: Blitzkrieg News cycle

2/17/2015

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In the early stages of your hype campaign, increase the frequency of your press releases.

In these times of incessant sensationalist media bombardment, people have attention spans shorter than...oh look a squirrel! What was I saying? Oh, yes, people have attention spans shorter than two Tweets plus a cute cat Vine video. This has caused media news cycles to become compressed. You may put out a press release that you think will give you days or even weeks of positive coverage and attention, but you're in for a rude awakening when it gets swamped by an avalanche of new Kardashian selfies.  Media outlets have to come up with content to fill 24-hours of coverage and because of this they try to make things appear to change more than they actually do to try in order to hold people's attention. In an effort to combat the slow intellectual erosion of potential investors, you must increase the frequency of your press releases and pseudo-events (events you create to make look like news) dramatically in the early going. Blitzkrieg can be translated into "Lightning War" and a method of warfare characterized by a series of fast and powerful attacks in short succession in a concentrated manner. Like the Germans invading Poland in 1939, you want to adopt a Blitzkrieg PR campaign in the early going. It hardly matters what you have press releases about--it matters more just that you are in the news. When this happens people will generally be seeing your company in the headlines and checking the stock and tweeting about your stocks, this rush of attention in a raging bull market will generally lead to dumb money flooding in and running your stock up--this is the perfect way to kick off your hype campaign. It is important to use creativity in order to come up with enough things to create press releases for in a short period of time (~1 week to ~3 months)--ideally you have news of new partnerships (do not disclose any terms or related financials) and can get positive association with bigger, more well known companies, such as when Elon Musk alluded to Tesla working in partnership with BMW: "We are talking about whether we can collaborate in battery technology or charging stations," Musk was quoted. (Nevermind that a BMW representative responded with this: ""Elon Musk is using us for PR purposes". "BMW can currently not recognize how the company would profit from Tesla because the young EV manufacturer does not have a technological advantage in any single area.")

"The electric car company Tesla gained about $2 billion in market capitalization after Elon Musk's October 1 tweet that it "was time to unveil the D and something else." - Be sure to work in cryptic language and vague references as much as possible, to let the mass' imagination run wild. 

Your Blitzkrieg Hype PR Campaign would be even better if you can also work in some press releases that highlight meaningless metrics, such as Tesla's in regards to opening their 50th Super-charging station in Europe, or Zillow's fluff PR from just one week ago: "More Than 1 Million Real Estate Professional Reviews Now on Zillow."  

Studying Elon Musk's Twitter history can also serve as a good guide. When there is bad news or operating results at your company, you should re-initiate another Blitzkrieg Hype-Cycle to shift investor attention away from your ongoing cash burn and instead dangle something shiny in their faces (just make sure the actual deliverables are years down the road).  In the early going any news is good news--once the gullible sheep believe your story hook, line and sinker and are acting as your Hype surrogates at cocktail parties and on message boards all over the internet, then you will want to slow the news flow to a dead stop. At that point, only positives will be projected upon you. This is akin to the wise saying that it is better to keep your mouth shut and let people think you are a fool than open it and remove all doubts. 



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Law #8: Paint a Rosy Picture

2/17/2015

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Picture
Pretend it is all positive, regardless of the actual outcomes and outlook you should eternally forecast rainbows and puppy dogs...always polish your turds. 













Every time you are forced to report your lack of earnings and give an operational update to investors, you should pretend it is all positive data regardless of the actualities. Reality is one of the most subjective concepts ever created and given your rising status as a cult leader, the investment community will mostly just take their price cues from your tone and excitability. Whatever substance (Dr. Pepper, cocaine), routine (yoga, meditation, certain sex act) or song (Bobby Darin "Don't Rain on my Parade) gets you in a good mood and amp'd up you should do this before your earnings call. What is often the case is that the actual lack-of-earnings report will be abysmal, but by the sheer force of will and over the top positivity a CEO can sway investors opinion into thinking the results were decent and not sell-worthy. Generally speaking, people are feeble minded and will parrot whatever you spoon feed them. They generally will not think...especially not for themselves nor expend mental energy on coming to independent conclusions so to take advantage of this you must tell them that your results are phenomenally positive and hence they will be perceived this way. Even when your results are clearly abysmal and there is no end in sight to your cash incineration, you should be relentlessly emphatic about how delightfully incredible they are and how excited your future cash burn due to new opportunities makes you.


In future Laws we will go into depth about how to explain away weakness and twist the facts as much as legally possible to make your results actually seem positive. 




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