During the great Ponzi Bubble of 2020 and 2021, many devout value investors, went over to the dark side. When cheap stocks refused to revalue, they saw Ponzis ramping and decided to participate. Why did they stray? It’s hard to say. Some simply wanted to make money. Others, feared for their firms if they didn’t play along—redemptions can be vicious. Maybe a few even believed in these companies, as pointing at the sky and making up a TAM had worked for so long, that value investing appeared to be dead. Who really knows?? I had multiple smart friends seriously trying to justify paying tens of billions, for unprofitable companies, run by known criminals. After a while, it all made my head hurt, especially as my friends were making money in Ponzi and I wasn’t. Unlike them, I was convinced that it would end—I simply didn’t know when.
Anyway, the whole Ponzi bubble has collapsed. Many of these crowd-favorites are down 80% or more this year. Suddenly, the value investors, turned Ponzi investors, don’t feel so cocky. Back in 2020 and 2021, I remember quarterly letters that talked about TAM, and boasted about how they were averaging down. Q1 of 2022 felt different. No one was bragging about TAM. They weren’t averaging down either. It’s hard to justify paying tens of billions for something that’s worthless when the share price stops going up. Funds still owned massive positions in these names, but they were now praying for a bounce so that they could get out—they now longer saw upside. As I’ve discussed, when a Ponzi detonates, it’s mostly just sad. Q1 letters were sad.
I bring this up because our industry works in quarterly timeframes. A lot of funds report their holdings to clients, especially mutual funds which are rather granular in their reporting. Many mutual funds are managed by the marketing departments, the portfolio managers are just well-tanned CNBC commentators. There’s no way to positively spin a Ponzi that is down 80% this year. Instead, the marketing department instructs the portfolio manager to dump it all by quarter end so that clients won’t see that they owned it. Those discussions happened back in May. The selling should be cleaning up today, on the last day of the quarter.
I know it sounds insane, but I’ve made a lot of money by playing these cycles. Event-Driven trading is a never-ending resource to harvest, and fund flows are frequently one of the best and most overlooked. I’m embarrassed to admit it, but I’ve bought a basket of Ponzis. I know good and well that these things are worthless. I have a tight stop in place, and we’ll see how it goes. But after a brutal quarter where the media taunts your idiocy, funds are desperate to simply exit—rather than admit they also owned Ponzis.
When the selling ends, the short covering will begin. Could be interesting for a few days or weeks before the primary trend once again takes hold. I’m playing for that, with a tight stop in place.
Disclosure: Funds that I control are long a basket of Ponzi Schemes
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