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

Laws: Table of Contents

Law #7: Give 'Un-Falsifiable' Forecasts

12/12/2014

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For a good hype campaign or to create a bubble. you have to increase the dependence of your investment thesis on "unfalsifiable" beliefs. This goes hand in hand with giving vague forecasts that are at a minimum 3+ years in the future. If something is unfalsifiable it creates polarization between those who believe and those who do not. It will generally be easy to find those who "believe" with minimal skepticism, push back, or need for empirical evidence--these are the naive suckers you are targeting at first. For those who do believe, when they are threatened with conflicting data or arguments against belief in whatever your investment narrative is, given that their premise is generally unfalsifiable (at least within the next three years), they will typically "double down" on their belief or increasingly shift their reasons for believing more and more towards whatever is most abstract, distant, or unfalsifiable. 


Tesla's narrative is going from 30k of annual unit production to 500k by 2020 and then will make "every kind of car imaginable." While one may be able to argue against such a narrative using historic case studies, point out that they do not make money and are missing current production targets, or show how much invested capital such dreams would require, it is not necessarily falsifiable within the next few years, which when following the Laws of Hype playbook, is more than sufficient time for the bubble mindset to set in to allow you to cash in on your inflated stock. Biotech as a whole is easily the most abstract industry and many hype narratives within biotech are based purely on pipelines for future drugs that are 3-5 years out, thus making it perhaps the industry most repeatedly susceptible to massive bubbles.  

On February 3rd, 1999 CBS 60 Minutes ran a special on Amazon called Jeff Bezos: The Nerd of the Amazon. In the segment the 60 Minutes anchor Bob Simon states that "the company says its investing for the future."  The company was stringing analysts and investors along then as much as they are now stating they had a multi-year time frame to reach profitability...giving them an edge over other public companies and venture capital backed competitors who needed to show profits.

Fast forward 15 years and Amazon is still not consistently profitable, losing $563 million in net income in just the last two quarters. In December 2013 the unprofitable Bezos was on 60 Minutes again in a masterful hype piece the day before Cyber Monday, unveiling the potential for same-day opto-copter drone deliveries. Once again Bezos was talking about investing for future profits, maintaining a vague multi-year time frame in reaching profitability, which is indeed unverifiable and "unfalsifiable." 

Bezos discussing the same-day drone deliveries: "This is early. This is still years away...It can't be before 2015. Could it be, you know, four, five years? I think so. It will work. It will happen. It's going to be a lot of fun."  This forecast is so vague it's anywhere from 2015-2019 and is thus unfalsifiable within the next three years, allowing gullible investors plenty of time for their imaginations to run wild with all the possibilities. ("can't be before 2015" --remember was said on December 1st, 2013).  

This 60 Minutes segment was a great piece of hype. Amazon got tons of press coverage for unveiling the potential for drone delivery, but were so vague about it actually working or when it would begin that they cannot possibly be pinned down to delivering on any "forecasts" and most likely the drone delivery initiative fades into oblivion over the years, if it hasn't already one year later. 

"In the long run, if you take care of customers, that is taking care of shareholders." - Bezos. Of course, this is absolutely not true, but it sounds good when stated confidently and in conjunction with unfalsifiable forecasts for future profitability. 

"That long term approach is rare enough that it means you are not competing against very many companies because most companies want to see a return on investment in, you know, in one, two, three years. I'm willing for it to be five, six, seven years." In another 15 years from now it is likely that Bezos will be singing the same tune while never giving specific forecasts and statements that can be dis-proven immediately. 


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Law #6: obscure data

12/12/2014

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Obscure data and lie to investors when necessary--your segment data and operational metrics reporting should resemble a never ending shell game. 

Segment transparency reduces your flexibility to shuffle data around when things turn ugly. You want to use selective transparency only when the metrics are in your favor, otherwise you should make analyzing your company as difficult as possible in order to turn people off from actually looking under the hood. For example, unlike every other auto manufacturer Tesla Motors does not report monthly sales data by country. This obfuscation of data allows imagination to take over and analysts can project all kinds of irrational hopes and dreams onto the company's actual results. If you are rolling out a new product country-by-country, but only reporting aggregate sales, it makes it unclear how your sequential and year-over-year sales comparisons look. Teslas's situation is the equivalent of a retailer opening new stores rapidly, but only reporting total sales and not same store sales comps and this provides the illusion of growth when in fact it has the worst growth of any auto maker in the US. 

As your operating results and certain metrics move in the wrong direction, slowly disclose less and less and simultaneously shift the focus to a different metric which is not yet eroding.  Another tactic to utilize is to consolidate segments when growth in key areas is declining. If things stabilize again, you can unwind the segment consolidation a few quarters/years down the road, or cherry-pick good data to share that is not verifiable from looking at your reported segment data (e.g. "Article in @WSJ re Tesla sales is incorrect. September was a record high WW and up 65% year-over-year in North America.").


Should you wisely choose to limit important disclosures, the most common scapegoat is the competitive landscape. Simply state that you don’t want your competition to know the margins of a certain segment or its sales growth, etc. What you can say is that disclosing the data the investor is requesting could potentially shed light on how amazingly profitable that segment is due to your exciting new products and competitors might use that information in their own price negotiations or in leveraging your customers to switch over because you are making so much money off their backs.  This is, of course, a bogus reason, as your competition already knows everything there is to know about your business. Another reason to not have better disclosures would be that you fear analyst can't analyze the data well due to its lumpiness, seasonality, or whatever else you can think of that patronizes and insults the market's intelligence (I for one, can't blame you). 
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Law #5: Emphasize Meaningless Metrics

12/9/2014

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Condition investors to focus on metrics that are unrelated to value creation or true fundamentals like cash flow.

From early stages of your hype campaign, you must condition investors to focus on non-fundamental value related metrics. There are the obvious ones, such as revenue, revenue growth, EBITDA, and adjusted pro-forma operational EBITDA, but I am talking about metrics that are even further removed from actually signaling anything about profits or cash flow. Consider metrics such as number of users, number of units sold, website views, hours listened, number of tweets, miles driven, kwh used on superchargers, etc. The metrics you choose to focus your hype campaign around may be unique to your business model or industry. In fact, they should be unique to your business if at all possible so that investors have absolutely nothing to benchmark you to or compare you to. If you are at a pre-revenue stage you have an even more inherent advantage over your less fortunate, more profitable peers in that you can start with a blank slate and begin to condition investors on meaningless metrics and milestones before cash flow is available to be scrutinized. For example if you are a medical diagnostic company like Exact Sciences, in order to shift focus off your $94 million cash burn rate, you will emphasize how many doctors are signing up to be able to potentially order your diagnostic test. Or, emphasize the percentage of patients complying with the doctor and actually shipping back the bucket of their feces. Whichever metric you choose to condition investors to focus on, it is all in an effort to deflect focus from your cash burn or lack of solid fundamental foundation. 

"...we averaged half a billion homes viewed on Zillow from a mobile device. This translated to 200 homes viewed per second, which is nearly 10 times greater than when we started tracking this metric three years ago. To give you some perspective, during the time of this one-hour earnings call, over 700,000 homes will be viewed on Zillow on mobile devices." - Spencer Rascoff, Zillow on the Q3 2014 Revenue Conference Call

"Amazon has released a large amount of data about online sales in 2012, with lots of factoids and vague figures for digital downloads, purchases, and product shipments. And the biggest piece of data revealed by the company was the number of packages it sold on the peak day of 2012.

On Nov. 26, Amazon sold 26.5 million items worldwide across all product categories. That equates to a whopping 306 items per second, a new record, according to the company.

Amazon also shed some insight into ebook purchases for the year. For instance, it revealed that 23 of its self-publishing (Kindle Direct Publishing) authors each sold over 250,000 copies of their respective books in 2012."

"The Amazon MP3 store has sold enough music for everyone at Woodstock ’69 to jam out to another three days of music for peace and love."

"Amazon customers added more than 15 million toys to their Wishlists this holiday season." -- This last one is not even related to anything generating revenue, simply what customers added to their saved wish-lists on their Amazon account. Here they are shamelessly hyping the potential for future revenue. 

Any press release or Revenue Conference Call transcript from Amazon will provide a plethora of ideas for you and get your hype juices flowing to assist you in your quest to find meaningless metrics to highlight and condition investors to focus on. None of these data points actually tell us anything about the profitability of Amazon. They could have sold 100% of these items at a loss, but the release had its intended effect which includes dozens of articles written in high profile publications and websites that highlight these meaningless metrics. The amount of press coverage Amazon generates from the meaningless metrics (from an investor's point of view) is mind-boggling and the exposure has a long tail, meaning the coverage goes on and on for weeks/months, perpetuating the cycle of hype.
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