I watched the movie The Big Short to learn more about the financial industry. For those who are unfamiliar with the movie, it’s a non-fiction depiction of the 2008 subprime shock from different people’s standpoints, ranging from a garage-size hedge fund to the elite figures dominating Wall Street banks. Even if you aren’t involved in the finance industry, it’s quite crazy to see the crisis from the insider perspectives. I connected with this movie on a deep level, as this crisis was my reality as a guy who used to work on securitization for Lehman Brothers.
Lehman was my first full time career in the financial industry. As a young twenty something employee, I was pretty naive and somewhat clueless about the true repercussions of my job. Not only my direct job as an investment banker, but more so my role in the larger scope of the global financial system, and how this system is uniquely and intrinsically related to the lives of every single person. I did not understand the consequences of the numbers I was crunching, nor their impact on other people. My sense of naivety is poetically expressed in the movie through the words of Brad Pitt, who plays a seasoned Hedge Fund manager.
“If we’re right, people lose homes. People lose jobs. People lose retirement savings, people lose pensions. You know what I hate about f*cking banking? It reduces people to numbers — every 1% unemployment goes up, 40,000 people die, did you know that?”
Brad Pitt’s character unveils the paramount idea of how small numbers in the finance world are inherently connected to real world things and people. I did understand this, and was in a sense numb to the consequences of my job.
My ignorance was short-lived, however, and my perspective has greatly changed since that time of my life. Now a California resident struggling with the ridiculous cost of living, I feel more in touch with the real world and its struggles. I run a startup and am frequently in contact with a multitude of investors, more specifically Venture Capitalists. Their ultimate goal is to make money by investing in small startups, hoping they will become unicorn companies with one billion dollar valuations. They are obsessed with numbers and ratios, constantly asking about market size, number of potential customers, average dollars per year per customer, and cost of customer acquisition. Asides from these numbers surrounding the business itself, they are engrossed by the number of shares they would gain by investing x dollars, and most importantly how much they would gain from said investment.
Despite this strong quantitative focus, it’s not all about the numbers. They love to hear about founder’s story. What kinds of problems did you find and how did you come up with your solution? Did you start off in ad-tech, recognize a widespread problem plaguing the industry, and carefully formulate a software solution? Were you a genius machine-learning engineer at one of the top-notch companies who found data cleansing a waste of time? Are you a mother who had trouble finding a suitable nanny in the midst of a busy career? These stories are critical when it comes to the final investment decision, which makes complete sense. Numbers are not the only thing driving the brilliance of an idea: it is the story behind these numbers and the fundamental idea the company is founded on that truly matters.
Here at Alpaca, our investors are typically in the retail trading field. They use a few different approaches to value our company and its potential opportunities, performing deep technical and quantitative analyses. However, as we dig more into their decision making process, it becomes clear that many, if not most, retail traders equally value more qualitative measures, considering the market as a whole and the story of the company. One of our friends says “I bought the shares of this semi-conductor company since I believe their products will be demanded in this coming cloud age” and another insists “oil and gas sector is my best investment since I think that won’t go anywhere as far as we transport human and goods.”
As we enter 2018, people are constantly talking about the great potential of AI and bots in the financial industry. Goldman Sachs reportedly reduced the number of human traders down to a few from hundreds. Although there is this focus on computers and numbers, investment decisions are at the end of the day, influenced at least partially by human emotion and psychological factors. Here at Alpaca, we strive to help maintain this well rounded investment strategy, balancing quantitative and qualitative elements. We have crafted an AI bot in order to help humans make better investment decisions and thrive. We think beyond the numbers, and truly care about creating a world where humans can utilize AI’s to lead happier, more fulfilled lives.