Jan-Feb 2020 by Luckbox Magazine

t e in ten a z on ag C M m o ew t N Cus t es r B d fo 19 ar 20 Aw lio Fo

life. money. probability.

JANUARY/FEBRUARY 2020

THE FAKE ISSUE

FAKE NEWS DEEPFAKES MEDIA BIAS THE REALREAL CATFISHING AUGMENTED & VIRTUAL REALITY PROFESSIONAL WRESTLING

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the control freak's guide to life, money & probability

january 2020

THE FAKE ISSUE 13 Fakery and the Authentication Economy

Business is booming for companies that identify and combat bogus news stories, doctored videos and counterfeit goods.

14 Truth Be Told: News Is Biased

If media consumers truly prefer neutrality in news, why do they favor biased news platforms? Here’s where online media stand in regard to bias and how and why they got there.

18 The Cost of Fake News

Cybersecurity company CHEQ and other sources break down last year’s $78 billion price tag.

20 The Real Threat of Deepfake

Videos of events that didn’t actually occur will soon menace the integrity of nearly everything.

24 Getting Real About The RealReal A consignment marketplace detects fake merchandise, but is its stock price for real?

27 Robert Scoble on Spacial Computing

Consultant and former Microsoft tech evangelist Robert Scoble says technology will blend the real and the vitutal in the coming decade.

32 Jeri Ellsworth on Augmented Reality

Luckbox sits down with Tilt Five CEO Jeri Ellsworth to hear her thoughts on what the future holds for augmented reality.

luckbox | january 2020

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editor-in-chief ed mckinley managing editor yesenia duran assistant editor mike reddy technical editor mike rechenthin contributing editor vonetta logan, tom preston creative director jacqueline cantu

p. 38

trends

trades

tactics

life, luxury & the pursuit of happiness

actionable trading ideas

essential trading strategies

BASIC

GAME THEORY

35 Wrestling With Reality

GAME THEORY

38 The Greatest Tennis Player of All Time

CHERRY PICKS

49 Volatility by Sector

THE TECHNICIAN

50 Real Expectations for Virtual Reality

59 A Better Way to Put It INTERMEDIATE

60 The Myth of the Protective Put ADVANCED

POKER

40 Bluffing is Real

ARTS & MEDIA

42 Richard Jewell & Hate Inc.

LIQUID ASSETS

NORMAL DEVIATE

54 2020 Foresight

CHEAT SHEET

63 Short Option Trade Management FAKE FINANCIAL NEWS

10 Catfish are Biting in Love and in Money

TRADER

46 Meet Jenny Andrews

44 Options Trading: An Antidote for Division

47 Capricorn Conjunction

61 False Prophets Are Wrong About Profits

DO DILIGENCE

56 Auto Show: Ford vs. Tata

43 White Booze

CALENDAR

MACRO VIEW

contributing photographer garrett roodbergen muse pete santori editorial director jeff joseph comments & story ideas feedback@luckboxmagazine.com request contributor’s guidelines, submit press releases & editorial inquiries editor@luckboxmagazine.com advertising inquiries advertise@luckboxmagazine.com subscriptions & service support@luckboxmagazine.com media & business inquiries publisher: jeff joseph jj@luckboxmagazine.com luckbox magazine, a tastytrade publication, is published at 19 n. sangamon, chicago, IL. 60607 editorial offices: 855.468.2789 ISSN: 2689-5692 printed at Lane Press in Vermont luckboxmagazine.com luckbox magazine @luckboxmag

LUCKBOX OF THE MONTH

64 OK Boomer

luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. Active investing is not easy, so be careful out there!

PHOTOGRAPH: CORINNE DUBREUIL/ABACAPRESS.COM

Novak Djokovic has faced formidable competitors for tennis GOAT.

luckbox | january 2020

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PEAK FAKERY That’s not honest Nothing you’ve said Why don’t you tell someone Who’ll believe you instead? ‘Cause I got this feeling Is it what they call déjà vu? I’m nodding my head, yeah But I don’t believe you —Lie to Me, Pretenders (2002) The idea for an issue of Luckbox that explores the increasingly blurred line between real and phony originated with a colleague. He pitched the concept by reciting the ever-growing list of fakery that we struggle to identify and avoid each day—counterfeit goods, evil social media bots, online catfishing scams, phony online reviews, annoying robocalls, false advertising claims, doctored video images and, of course, fake news. With that abundance of falsity in mind, The Fake Issue was immaculately conceived. As we researched the replications, simulations and imitations that surround us, both online and in real life, a philosophical question arose. What if everything is fake? In the movie The Truman Show the unsuspecting hero dwells in a giant simulation of life that’s

thinking inside the Luckbox Luckbox is dedicated to helping hardworking, active investors achieve skill-derived, outlier results. How?

televised 24-7. He doesn’t know his wife’s an actor or that carpenters assembled the dome that serves as the sky. The movie raises the distressing question of whether a simulated life can have meaning. The Matrix films offer an even darker vision of fake reality. People’s minds dwell in a simulated world that looks a lot like Earth at the beginning of the 21st century. But they’re actually lying motionless in liquid-filled pods, their bodies producing electricity to feed the machines that have usurped the planet. Could art have been imitating life? What if we’re actually living in a simulation? Elon Musk believes in the simulated universe hypothesis. Posited in 2003 by British philosopher Nick Bostrom, the hypothesis holds that the pace of scientific advances suggests humanity will inevitably create technology capable of running convincing simulations of reality. That could mean we’re living in a simulation right now. In fact, probability favors that notion, according to Musk. “The odds that we’re in base [true] reality is one in billions,” Musk maintains. Living in a simulation? We should be so lucky. Who would

1 tune out the

noise and false prophets in the investment world and take control

2 probability is the

key to improving outcomes in the markets and in life

3 timely investment

themes, sectors and stocks matter only because they tend to produce greater volatility

4 greater volatility

brings greater opportunity

devise a world where we’re bombarded with the bogus? It’s reached the point that tech entrepreneurs are going into the business of separating facts from what’s phony—a phenomenon we’ve dubbed The Authentication Economy. The Fake Issue assesses what’s being done to combat fakery (p. 14), explains why fake news cost $78 billion in 2019 (p. 18) and warns of the disturbing threat of synthetic media and deepfake videos (p. 20). On the upside, the issue also notes both the potential and the practicality of virtual reality and augmented reality (p. 27). So the fakery that bedevils us today could become the fakery that benefits us tomorrow. Ed McKinley editor in chief

Jeff Joseph editorial director

5 options are the

best vehicle to manage risk and exploit market volatility

6 don’t rely on

luck—know your options—luck smiles upon the prepared

two ways to send comments, criticism and suggestions to Luckbox Email feedback@luckboxmagazine.com Reader Survey luckboxmagazine.com/survey A new survey with each new issue

luckbox | january 2020

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Luckbox Reader Survey The Downtrend in Trust Gallup has been surveying Americans on their trust in the media since 1972, when 68% said they trusted their news sources “a great deal” or “a fair amount.” Similar levels of trust were recorded in in 1974 (69%) and 1976 (72%). But when Gallup asked the question two decades later, trust had declined to 53%. It hovered around 50% until 2004, and now it’s down to 41%. But those numbers don’t apply in the Luckbox community. Only 14% of the readers who responded to the magazine’s poll on the subject professed confidence in the media (right). We get it. Lots of the seasoned investors who read Luckbox lost confidence in the media after financial pundits continued to cheerlead for tech companies until the very moment the dot.com bubble burst. You know a false profit when you hear one.

How much trust do you have in mass media?

Gallup Poll

Luckbox Reader Survey

A great deal

13%

A fair amount

28%

12%

Not very much

30%

42%

None at all

28%

44%

Media ranked by credibility and reliability 1. Wall Street Journal 2. FOX News 3. NPR 4. ABC, CBS & NBC 5. New York Times 6. CNN

Take the reader survey. Luckbox may publish your comments!

Source: Luckbox Reader Survey

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Open Outcry Side Hustles and the Gig Economy

The Media & “Fake News”

The Side Hustles issue was great! It details this important emerging phenomenon that may very well be the bridge to the post A.I. economy. —Joe Bomber, Poplar Grove, IL

The Wall Street Journal still employs a few journalists, but not many. CNN, MSNBC, NPR, NYT, etc., produce nonstop, negative op-eds about anything and everything that isn’t part of the Democratic establishment. This forces me to watch Fox News and other rightleaning media just so I can get the other side’s story. It was a lot better when the media had to compete for the mass market. Keeping the story between one standard deviation of normal was where the money was. Now it’s all about “niche” marketing. I am staunchly independent, vote both sides of the aisle, but I am appalled with the fanciful Russian collusion coverage. —David Lovett, Saline, MI

Luckbox is a stand-out magazine that actually fits my needs. No spin, no bullshit. The GOAT of financial magazines. A side hustle is actually how I’m paying for my trading and writing career. —Sascha Illyvich, Decatur, GA Shocker! A whole magazine that is actually practical and useful. Who would have thunk it? Thanks for the fun and practical issue. —Jon Seed, Evanston, IL The Big Tech Catastrophe

I really love the perspective and honesty. You guys remember the history of the subject of an article to get the whole picture. For example, when Zuckerberg visits Washington other news agencies report that he has turned into an angel, instantly forgetting his checkered past, but not you guys! —Dennis Kasabian, Folsom, CA

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I don’t trust any source that has any affiliation with Fox News. I trust the Wall Street Journal somewhat, but only on stories related to business. Their writers may not be as knowledgeable as the average (tasty) trader, but some of their reporting has been excellent—their investigation into Theranos was a prime example of this. FiveThirtyEight is where I go for political analysis because I like that they present a lot of data to back up almost everything they write. —Justin Bellassai, Columbus, OH

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SHORT INTEREST

THE FAKE ISSUE “The strongest argument for us being in a simulation probably is the following: 40 years ago, we had pong—two rectangles and a dot. That is what games were. Now, 40 years later we have photorealistic 3D simulations with millions of people playing simultaneously, and it’s getting better every year. And soon we’ll have virtual reality and augmented reality. If you assume any rate of improvement at all, the games will become indistinguishable from reality.” SEE PAGE 6

—Elon Musk

$18.8 billion Forecasted worldwide spending on augmented reality and virtual reality in 2020. This achieves a five-year compound annual growth rate of 77%, which would put AR/VR market size near $200 billion by 2024. Source: International Data Corporation, November 2019

SEE PAGE 27

“It’s kind of beating a dead horse if you’re talking about going out and saying wrestling’s fake.” —Owen Hart, who fell to his death in 1999 while preparing to make a stunt entrance from the arena rafters on live TV

SEE PAGE 35

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Fake goods account for

One year ahead of the 2020 election, the top 100 fact-checked political fake news stories have been posted over 2.3 million times and have attracted an estimated 158.9 million views, enough disinformation to reach each of the 153 million registered voters in the 2018 midterm elections once. SEE PAGE 14

3.3 of world

trade, and the percentage is rising. Source: Organization for Economic Cooperation and Development report

Source: Avaax, November 2019

SEE PAGE 24

“High-quality AI-manipulated video ups the stakes considerably. It is only a matter of time before deepfakes are used in an attempt to manipulate elections.” —Paul Scharre, Center for a New American Security

“Our brand is to keep fakes off the market.” — Julie Wainwright, CEO of The RealReal

SEE PAGE 20

january 2020 | luckbox

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FAKE FINANCIAL NEWS

Separate fact from fiction to reveal the traps set by bogus online daters and fake financial marketers

By Vonetta Logan

magine that you’re using a dating app and swipe right on a comely lass or rugged fella. You “match” and then the witty banter ensues. A few flirty emojis, some well-placed innuendos, and your heart starts beating fast. Your mind races to the possibilities, and you innocently ask for more information: When can we meet? Do you have any more pics? Is that REALLY you with Sting? Then the wheels start to come off. Your dream date is nothing more than a catfish, a person using someone else’s identity to lure people into an amorous trap. Your Instagram-ready bikini beauty is really a bored Nebraska housewife, or your rugged beau with the intricate tattoos and sweet chopper is really a 12-year-old kid and you’re now looking at a jail sentence. Misrepresentation is common in the tech-based dating scene, but it’s also common in the financial news sector. Retail investors are getting financially catfished every day. Here’s an accounting of some of the worst.

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Who could forget the seemingly unanimous decision by broker-dealers to reduce commission rates on stock and exchangetraded fund (ETF) trades to zero? The move was hailed as “gamechanging” and “revolutionary” but left many wondering how firms could do it. There’s no such thing as a free lunch, right? “Commissions have ratcheted down in fits and starts for years,” according to a recent Bankrate article, “but for some brokers, commissions are not the largest part of their business. While they’d prefer not to cut commissions, they have other ways to make up the revenue.” Charles Schwab, which recently announced its intent to acquire competitor TD Ameritrade, saw revenue generated from trading fall from 15% in 2014 to just 8% in 2018. Most of Schwab’s revenue comes from income on client funds and from asset management. They probably derive revenue from selling clubbed baby seals, but we can neither confirm nor deny that. So what does “zero commissions” really mean for retail investors? Catfish revealed: Firms have reduced commissions on stocks and ETFs to zero but are still charging for options trades. Many brokers are still using legacy technology platforms that are as bloated and slow as you feel after an all-you-caneat buffet. Most brokers have a wide array of “asset management” services. They want to manage you out of your assets. They’re selling your information so they can upsell you later. Only 54% of Americans own stocks. Most new investors are reluctant to jump into stocks because equities are at an all-time high and the capital commitment is huge.

ILLUSTRATION BY LUCKBOX STAFF, SHUTTERSTOCK IMAGES

Catfish Are Biting in Love and in Money

LESS THAN ZERO

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CHEAT CODES

ANALYZE THIS!

There is no scarier sentence than, “Well, I saw it on Reddit, so it has to be true!” In late October the subreddit r/wallstreetbets, whose tagline is “Like 4chan found a Bloomberg terminal,” was filled with glee over the discovery of an “infinite money cheat code” on the trading app Robinhood. In simple terms, Robinhood’s platform seemed to have a real issue calculating margin correctly with option credit spreads. Marketwatch put it this way: “The problem is that the app incorrectly adds the value of the options to the user’s original cash on hand, allowing them to borrow larger and larger amounts, with apparently no limit.” One person leveraged $2,000 into $50,000 and then lost it all. Another user said he turned $4,000 into $1 million of buying power. A reddit user hilariously wrote an email to TD Ameritrade asking for the “infinite cheat code” tier of service and got this hilarious response: “Nah bruh, we’d be out of business if we did.” So can you really cheat your way to financial success as easily as beating the final level of Super Mario?

Buy. Sell. Hold. Even if you don’t actively trade, you’re probably familiar with the triumvirate of analysts ratings. Chris Reining, a millennial investor who retired at the age of 37, explains on his site that “countless studies have shown that stock recommendations and the opinions of analysts are of little value to ordinary investors.” Reining provides details on the intricate dance of patronage. “Institutional investors (hedge funds or mutual funds) need to decide which firm they want to buy their stock research from,” he says, “and they highly value if the firm and analysts have direct access to the management of the companies they cover.” And how do analysts maintain that access? By sucking up to management and making positive remarks and recommendations, even if their “numbers” don’t support it. Luckbox readers, this reporter is a newly minted trader and recently felt the sting of analyst stupidity. Selling an iron condor, with $5 wide strikes in Roku, was a delta neutral position that followed good tastytrading mechanics. Then, on a day that will live in infamy, Morgan Stanley rated sweet Roku at “underweight” and the stock tumbled 16% in a single day. Roku hadn’t murdered anyone, and as far as we know, Roku doesn’t cause cancer, nor is Roku clubbing baby seals, but an analyst changed the game with a tweet. So how can you protect your sweet, baby trades?

Catfish revealed: The glitch was exploited by fewer than 30 Robinhood Gold users and led to losses of less than $100,000 for the company, but it did lead to real losses for users who were subsequently blocked on the app. Gamification of investing isn’t as evil as you think. Stodgy economists warned of stock apps becoming synonymous with video games or gambling platforms. As long as people understand that real money is at stake, they can enjoy the engagement of trading. Using legacy tech that looks as old as it feels isn’t going to draw new investors. The Securities and Exchange Commission is investigating Robinhood, and the company has pulled its request for a banking license. Imagine an infinite money cheat code for your checking account! You can responsibly use margin by using options, and soon retail investors can take advantage of the “smaller” futures contracts (from the likes of the Small Exchange) to trade futures instruments in a smaller, more manageable size.

Catfish revealed: Analysts are street walkers selling their goods to anyone who wants a taste. Analysts are compensated generously for building relationships with institutional investors, and they maintain those relationships with favorable reviews of companies. Analysts aren’t traders! Read any financial site the day after a company beats earnings and watch as all the “upgrades” roll in. Imagine being able to bet on your football team AFTER they win a big game. No one knows anything! Probabilities and good mechanics will outperform biased ratings any day of the week.

“While brokers would prefer not to cut commissions, they have other ways to make up the revenue.”

VALUABLE LESSONS Get active! So as we roll into a new year, dear trader, what have we learned? Why should you take a proactive approach to trading and investing? Trading makes you a better decision maker in all facets of life. People love intellectual challenges and trading provides strategic engagement to those challenges. You’ll learn how to use probabilities to assess risk (this one is fun at parties). You’ll appreciate finance! Step away from the herd And what does active investing do for your portfolio? You can craft a portfolio that generates returns independent of market performance. You will see volatility as an opportunity instead of a harbinger of uncertainty. You can finally experience true, multi-level diversification and not just some halfstock, half-bond charade. You can have definitive ranges for probability of profit and manage expectations on order entry instead of worrying that your entire fortune will go down the tubes on a tweet. Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan

january 2020 | luckbox

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THE FAKE ISSUE Real or fake? People are asking themselves that question more often every day as bad actors and smart machines crank out online lies at a dizzying pace. But the good guys who are developing technology to counteract digital falsehoods may discover a higher form of truth.

Truth Be Told: News is Biased

Fake News: A $78 billion problem

The Real Threat of Deepfake

p. 18

p. 20

Getting Real About RealReal

Possibilities in Spacial Computing

Jeri Ellsworth on Augmented Reality

p. 24

p. 27

p. 32

p. 14

luckbox | january 2020

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Fakery and the Authentication Economy Business is booming for companies that identify and combat bogus news stories, doctored videos and counterfeit goods By Ed McKinley

akery permeates life in the 21st century. On every continent but Antarctica, humans and smart machines are laboring around the clock to churn out falsehoods. They’re lying to gain unfair political advantage, peddle bogus merchandise, sabotage competing businesses, manipulate markets or simply to stoke hatred. And the onslaught of false narratives is poised to become profoundly worse. Deepfakes—videos that portray incidents that never really happened—are becoming more convincing. (See “The Real Threat of Deepfakes,” p. 20.) So far, fairly clumsy deepfakes have mostly pasted the faces of celebrities onto the bodies of porn stars, producing bogus porno that doesn’t look real. But soon, as early as sometime this year, deepfakes will almost flawlessly depict politicians delivering statements they would never make. False videos will almost certainly compromise the integrity of the 2020 presidential election and sharpen the already insidious attacks plaguing corporations. But there’s hope. The avalanche of lies is feeding a booming market-

place for sleuths who sort what’s real from what’s not—call it the Authentication Economy. Take the example of The RealReal, an online and bricks-andmortar group of consignment shops that specializes in lightly used luxury-branded merchandise. (See “Getting Real about RealReal,” p. 32.) While most authentication companies use software to reveal falsehoods, The RealReal depends upon a squadron of human experts to verify the provenance of what it sells. The struggle against fakes began with far-sighted entrepreneurs who established the oldest authentication companies decades ago—long before digital fakery began spiraling out of control. Snopes.com, for example, has been fact-checking and exposing urban legends and hoaxes since 1994. But it’s not just a matter of checking articles for accuracy. Authentication companies combat the “trending content” model by creating algorithms that assess and rank articles and news sources for accuracy, truthfulness and bias. That holds content creators to account for accuracy. Companies that specialize in authentication also wage war. They go to battle against bots, the primary

distribution engine for online disinformation. The good guys monitor the behavior of site visitors to detect and block non-human behavior. It’s a big job because bots accounted for 52% of internet traffic last year, researchers say. And the job continues to get bigger. Authentication companies are using something called geometric deep learning, which relies on a new type of algorithm that’s capable of studying huge, complex sets of data. It’s part of the ongoing effort to keep up with the ever-expanding bad behavior that ravages the internet. Meanwhile, some companies aren’t stopping with authentication. They’ve spent so much time visiting sites all over the political spectrum and authenticating what they find there, that they’re taking the next step and creating content themselves. They’re basing their news stories on the objectivity they hope to have learned by considering as many points of view as possible. (See “Truth be Told,” p. 14.) Such companies are leading a new response to the explosion of online fakery. The technology they’ve designed to detect fakes may also help create a new, truer level of truth.

january 2020 | luckbox

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THE FAKE ISSUE

Media

Truth Be Told: News Is Biased (Odds Are … You Are, Too) What people say they want in surveys and where they click online doesn’t add up By Mike Reddy

More than 75% of Americans believe it’s never acceptable for news media to favor one political party over others. Yet big-name media outlets, such as Fox News, MSNBC and CNN, are lambasted daily for alleged favoritism. If media consumers truly prefer neutrality in news, why do they favor biased news platforms?

ore than a century before Neil Armstrong would set foot on the moon, English astronomer Sir John Hershel was using a telescope to study it. With powerful new telescopic technology, Hershel purportedly discovered that the moon was home to man-bat hybrid extraterrestrial life. At least, that’s what defunct New York newspaper The Sun reported in a six-article series in 1835. The only truthful aspect of the articles, referred to now as the “Great Moon Hoax,” was that Hershel was an astronomer. The telescope was fake, the name of the writer was fake and the journal where Hershel’s

research supposedly appeared wasn’t being published at the time. And the man-bats? They were fake, too. Notably, the moon hoax was published on the heels of what historians call the “Party Press Era,” the period from the 1780s to the 1830s when newspaper editors unabashedly received—and largely depended on—financial support from political parties. In return for the money, prestige and power, editors published endorsements for their parties and didn’t hold back from flinging attacks against the others. Blatant biases were commonplace, and although the term has only recently been cropping up in dictionaries, nothing’s really new about “fake news.” Choosing biased sources Novel or not, bias and disinformation affect public perception of news media today. A 2019 Gallup survey found 28% of Americans had no trust or confidence in the mass media to report the news fully, accurately and fairly. Only 41% indicated that they had either a “great deal” or “fair amount” of trust and confidence, compared with 68% when the survey was

first conducted in 1972. These trends, signaling that trust in news media has taken a beating, beg the question: What, if anything, can be done to restore faith in the fourth estate? The answer depends partly on truthfulness in media. Americans believe 62% of news in newspapers, TV and radio is biased, according to a Gallup/Knight Foundation survey. And a Pew Research Center survey in 2018 found that 78% of Americans believe it is never acceptable for news media to favor one political party over others when reporting the news. But what people say they want in surveys and how they vote with dollars—or, clicks—doesn’t neatly match up. Some news consumers say CNN has an intolerable left-leaning bias and Fox News an insufferable right-leaning one, but SimilarWeb estimates CNN’s landing page racked up nearly 520 million hits in the past six months, and Fox’s scored more than 320 million. During the same period, the pages of outlets with more neutral reputations, such as USA Today and Associated Press News, only saw 119 million and 22 million hits, respectively.

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Why then, if consumers can choose sources with more neutral reputations, do they continue to flock to the most polarizing ones? The underlying causes are a mixture of innate psychological phenomena, including individual biases and tribalism, and technological innovation brought on by the web, such as algorithms. A drive to affirm one’s personal identity plays a significant role, according to Jay Van Bavel, director of the Social Perception and Evaluation Lab at New York University. “Most citizens cannot tell the difference between a news story and opinion,” Van Bavel told Luckbox. “So what’s happening is they like the opinions that resonate with their own and fit with their own identities and tribal affiliations.” Reinforcing beliefs Assessing stories for bias on sites with polarizing reputations, such as Fox News, shows that the news reporting itself isn’t as biased as the opinion-based offerings, according to Van Bavel. “It’s opinion people who are slanted, but the opinion people have the highest ratings because those are the people who appeal to [a consumer’s] identity,” he said. Algorithms employed by social media sites further complicate matters. More than two-thirds of American adults indicated in a 2018

Pew study that they at least occasionally got their news from social media. Sites such as Twitter rely on algorithms designed to increase engagement to determine what posts users see or don’t see. Twitter used to put tweets at the top of the feed in chronological order, but that’s no longer the case. Now, Twitter showcases the postings that algorithms judge most likely to reverberate with the user. Here’s how the changes unfolded: In 2014, Twitter rolled out “recommendations,” which suggested tweets, topics and accounts to follow. In 2016, the platform began restructuring timelines with algorithms favoring “best tweets,” or tweets that garnered a lot of attention. That algorithm was further refined in 2017 to predict and deliver content users would be most likely to find engaging. That’s good for business but doesn’t necessarily help keep the peace, Van Bavel said. “Companies make money by having you online as much as possible,” he said, “and to do that they benefit from promoting in your news feeds things that get you worked up the most, either positively or negatively. The algorithms are designed in ways that reward outrage and conflict and polarization. They’re not designed in ways that cool down the temperature of the conversation— that amplify intellectual humility and nuance.”

In a tweet, every word that stirs moral outrage or triggers emotional language causes a 20% increase in the likelihood a user will retweet it, Van Bavel said. It’s a phenomenon that headline writers have learned to embrace. Near the end of 2018, Twitter introduced the option of toggling between the algorithm-based “Top Tweets” and the chronological “Latest Tweets” models. But the platform assigns anyone unfamiliar with those settings to “Top Tweets” by default. Persuading social media platforms to abandon algorithmic models that increase traffic, and therefore revenue, is a tough sell. But people could apply psychological approaches to help encourage civil, constructive discourse, Van Bavel suggested.

“Why do people flock to the most polarizing news sources?”

Tribalism: Strong loyalty to one’s own tribe, party or group.

Big Little Lies The following headlines sat atop the fake news stories viewed most often on Facebook in 2019, according to Avaaz, one of the largest online activist networks. Ocasio-Cortez Proposes Nationwide Motorcycle Ban Motorcyclists rejoice—AOC is not confiscating bikes! But that didn’t stop this fake news story from collecting 694,504 interactions and an estimated 12 million views. Pelosi Diverts $2.4 Billion From Social Security to Cover Impeachment Costs This false narrative about House Speaker Nancy Pelosi garnered 1.4 million interactions and an estimated 24 million views.

Jay Van Bavel

John Gable

Trump’s grandfather was a pimp and tax evader; his father a member of the KKK Raking in 1.6 million interactions, this fake news story about President Donald Trump’s relatives was by far the most-shared fake news item with an estimated 29 million views.

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THE FAKE ISSUE

“Unbiased news doesn’t exist”

Media

One of those approaches calls for simply affirming to others that they’re valued before introducing facts contrary to their beliefs or likely to make them uncomfortable, he said. Another is rooted in recognizing one’s own “bias blind spots” before engaging with others. “It’s starting from a position of a little bit more intellectual humility,” he said, “and so understanding that may make the conversation go

better rather than if you come off as somebody who is arrogant and a know-it-all.” The polarizing web John Gable, who formerly served as lead product manager for Netscape Navigator, told Luckbox he saw the potential the internet held for political polarization as far back as 23 years ago. After reading Neil Postman’s book Amusing Ourselves to

ALLSIDES’ MEDIA BIAS CHART AllSides media says it bases its bias ratings on multi-partisan, scientific analysis. It rates online articles only—not TV, print or radio offerings. The ratings do not reflect accuracy or credibility; they speak to perspective only. The allsides.com site contains more than 600 media bias ratings.

Death, Gabel came to believe that the transition to the internet as a dominant medium, much like the transition from written word to television, could introduce new ways for people to discriminate against each other. “And that led me to create a patent on how to identify bias,” Gable said. “The idea was to be able to identify different points of view— different sentiment, if you will—so that we could automatically show different points of view and give people a more complete picture.” So Gable put together a prototype, and in 2012 launched AllSides, a site that aims to “strengthen our democracy with balanced news, diverse perspectives, and real conversation.” He built the site upon the notion that unbiased news doesn’t exist—and the belief that that’s not a bad thing. Instead, because social media and search browsers are designed to promote either the most popular opinions or the ones that match consumers’ preferences, it’s important to hear from all sides, breaking people free from “filter bubbles.” Center news often leaves out arguments from the left and or right—arguments sometimes essential to seeing humanity in all its diversity, Gable said. So AllSides, where Gable serves as CEO, assigns the bias ratings of “Left,” “Lean Left,” “Center,” “Lean Right” and “Right” to help visitors identify the perspectives of their news and explore perspectives they might not have otherwise. The site enables visitors to search for news coverage by specific issues or topics, and in its “Balanced News” section, shows how media outlets with differing bias ratings cover the same story. “If we were selling food online, and all you’re looking at is clickthrough rates, then the only food we would ever sell are Cheetos and Mountain Dew,” Gable said. “If that’s all you

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ever eat, you get a stomach ache, and that’s exactly what’s happening with journalism.” AllSides began as a technology company, and Gable hadn’t intended to create a web destination. Money wasn’t spent on direct marketing, but the press coverage the site attracted brought organic traffic, including visits by teachers who wanted to discuss current events in school but weren’t allowed to because of the perceived biases of news outlets. “We gave them that ability,” Gable said. “Only two years ago did we start a non-profit for schools, start raising money for non-profit, and we’re already being used in all 50 states by 20,000 students every week.” “It’s just growing like nuts,” Gable said. The site reaches around three million impressions every month, and direct web traffic increased by at least 20% each month during the second half of last year. Although detecting fake news and biases in media isn’t as simple today as during the “Party Press Era,” or when “The Great Moon Hoax” made front page news, sites like AllSides are trying to make it easier. News consumption may have something in common with proactive investing. Without a diversified portfolio, traders run the risk of losing big-time. Without news from across the spectrum, voters could fail to get the whole story.

How They Spin It Media bias assessments from AllSides demonstrate how media outlets serve up varying perspectives on the same event. To illustrate, a recent “headline roundup” from AllSides shows how three publications took perspectives from the left, right and center. After studying a host of articles, AllSides provides its own summation and supposedly neutral analysis of a news event. Here’s what it said about the information it gathered for the headline roundup above: Concerns with “Serious Errors” by FBI in Warrants to Spy (An AllSides analysis) “Basic, fundamental and serious errors” by the FBI, especially in getting a warrant from the FISA court to “spy” on American citizens, has raised serious concerns about civil liberties from the left, center and right. Information presented to the FISA (Foreign Intelligence Surveillance Act) court was described by Department of Justice Inspector General Michael Horowitz as misleading with 17 examples of “significant inaccuracies and omissions” including one case where an FBI lawyer altered an email to help persuade the court to approve a warrant to spy on a Trump campaign aide. While many groups from the left that normally would be outraged by infringements on civil liberties by national security authorities remained relatively silent, presumably because criticism would politically benefit President Trump, others like the ACLU called for reform. Many on the right were not only outraged by these actions against civil liberties, but also how the FBI under the Obama Administration used misleading and altered evidence to obtain permission to spy on a political rival’s campaign. They felt that even if the Inspector General could not find direct evidence to prove bias, the underlying bias was self-evident and their actions were corrupt. —AllSides Headline Roundup, Dec. 15, 2019

“Promoting outrage, conflict and polarization can keep people online longer.”

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THE FAKE ISSUE

Media

Fake News: A $78 Billion Problem The Economic Cost of Bad Actors on the Internet Cybersecurity company CHEQ commissioned economist Roberto Cavazos of the University of Baltimore to put a dollar value on the harm caused by bad behavior on the internet. The study of ad fraud, disinformation and fake news produced some alarming conclusions ...

THE ANNUAL COSTS OF FAKE NEWS

Fake Newsâ&#x20AC;&#x201D;The deliberate creation and sharing of false and/or manipulated information that is intended to deceive and mislead audiences, either for the purposes of causing harm, or for political, personal or financial gain Source: U.K. House of Commons Digital, Culture, Media and Sport Committee, February 2019

AN ESTIMATED

$200 MILLION

WILL BE SPENT SPREADING FAKE POLITICAL NEWS IN THE 2020 ELECTION CYCLE Brand Safety $250 million Political Spending $400 million Online Platform Safety $3 billion Public Health Misinformation (U.S.) $9 billion Reputation Management $9.54 billion Financial Misinformation (U.S.) $17 billion Stock Market Losses and Volatility $39 billion Total $78 billion

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Source: Trend Micro

PHOTOGRAPH: REUTERS/ TOLGA AKMEN

“Fake news by anti-vaxxers on social media has fueled a tripling in measles cases in the country.” —Simon Stevens, head of the National Health Service in the U.K.

Amount (at least) Russia spends per year on pro-Kremlin media to create disinformation.

$2,600 can buy a social media account with more than 300,000 followers; $55,000 is enough to fund a Twitter attack that discredits a journalist; and $400,000 can influence trade policy, change the vote on a referendum or flip the results of an election.

$1.2 Billion

Low Barriers to Entry

Real Losses from Fake News Fake news caused stock market losses of $300 billion in a single incident in December 2017. It happened when ABC reported that National Security Adviser Lt. Gen. Michael Flynn would testify that President Donald Trump had instructed him to contact Russian government officials during the 2016 election campaign. Immediately after the story, the S&P 500 fell 38 points for a loss of $341 billion. The “bombshell report” from ABC was false. ABC didn’t retract the story until after the end of the trading day, at which point the loss had lessened to $51 billion. In general, fake news has caused a potential loss of up to 0.05% of stock market value, according to an analysis of cases. That amounts to a $39 billion annual loss as a direct result of fake news.

“Fake news today is like a modern-day tech suicide bomber in the worlds of communication, reputation and branding. It only takes one wellplanned success to hurt a lot of people or an organization.” —Mike Paul, president of Reputation Doctor

Source: Andrus Ansip, former vice-president of the European Commission

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THE FAKE ISSUE

Realty Bytes

The Real Threat of Deepfake Videos of events that didn’t really happen can overturn elections and sabotage companies By Jeff Joseph

or decades, graphics geeks and the digital literate have been using platforms like Adobe Photoshop and After Effects to alter photos and videos. They do it to promote a cause, advertise a business, campaign for a politician, get a laugh with a visual gag or put a celebrity’s face on a porn star’s body. Until recently, the process required specialized skills and took considerable time, and the results were obviously fake. Anyone could tell with the naked eye that the images were doctored. But that’s changing. Today, artificial intelligence (AI) is lowering the cost of fake videos, reducing the time it takes to make them and

eliminating the need for special skills to manipulate the digital images. At the same time, the fakes are reaching a level of realism that tricks the eye and the mind. Take the example of fake videos of politicians delivering speeches. Viewers feel they’re seeing and hearing the candidates say things they have never really said. It’s happening because AI captures facial characteristics from thousands of images and puts them together to create a video that’s totally convincing. Welcome to the world of deepfakes. The term (a mashup of deep learning and fake) and its underlying technology achieved notoriety when a Reddit user whose

handle was deepfakes published a series of real-looking fake celebrity pornographic videos in 2017. Fake found a new forum and, with the speed of Moore’s Law, deepfakes are becoming the latest existential threat to political, cultural and privacy norms. The threat of deepfakes has already expanded beyond victimizing female celebrities in fake pornography. It’s moved into corporate espionage, market manipulation and political interference—presenting a grave new challenge for the Authentication Economy. Last May, Florida Senator Marco Rubio warned the U.S. Senate Intelligence Committee that bad actors

PHOTOGRAPHS: BILL_POSTERS_UK INSTAGRAM

The pornography industry latches onto new ideas quickly, particularly when it comes to technology. Porn pioneered internet-based video streaming services a year before CNN and a decade before YouTube. But porn’s latest foray into technology could be as disturbing as it is disruptive.

THESE ARE ALL FAKE A series of chillingly realistic fake videos depict everyone from Mark Zuckerberg to Donald Trump uttering statements they would never really make. Their creator, U.K.-based former street artist Bill Posters, says he produces the fakes as his way of exploring and challenging propaganda.

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The State of Deepfakes: Landscape, Threats and Impact By Giorgio Patrini The rise of synthetic media and deepfakes is forcing society toward an important and unsettling realization: The historical belief that video and audio are reliable records of reality is no longer tenable. Until now, people trusted that a phone call from a friend or a video clip of a known politician was real because they recognized the voices and faces. People correctly assumed that no commonly available technology could have synthetically created the sound and images with comparable realism. Videos were treated as authentic by definition. But with the development of synthetic media and deepfakes, that’s no longer the case. Every digital communication channel our society is built upon—audio, video or even text—is at risk of being subverted. The deepfake phenomenon is growing rapidly online, with the number of deepfake videos almost doubling over the last seven months to 14,678. Meanwhile, the tools and services that lower the barrier for non-experts to create deepfakes are becoming common. Perhaps unsurprisingly, web users in China and South Korea are contributing significantly to the creation and use of synthetic media tools used on the English-speaking internet. Another trend is the prominence of non-

consensual deepfake pornography, which accounted for 96% of the deepfake videos online. The top four websites dedicated to deepfake pornography received more than 134 million views on videos targeting hundreds of female celebrities worldwide. This significant viewership demonstrates a market for websites creating and hosting deepfake pornography, a trend that will continue to grow unless decisive action is taken. Deepfakes are also roiling the political sphere. In two landmark cases from Gabon and Malaysia that received minimal Western media coverage, deepfakes were linked to an alleged government cover-up and a political smear campaign. One of the cases was related to an attempted military coup, while the other continues to threaten a high-profile politician with imprisonment. Seen together, these examples are possibly the most powerful indications of how deepfakes are already destabilizing political processes. Without defensive countermeasures, the integrity of democracies around the world is at risk. Outside of politics, the weaponization of deepfakes and synthetic media is influencing the cybersecurity landscape, making traditional cyber threats more powerful and enabling entirely new attack

vectors. Notably, 2019 saw reports of cases where synthetic voice audio and images of non-existent, synthetic people were used in social engineering against businesses and governments. Deepfakes are here to stay, and their impact is already felt on a global scale. Deepfakes pose a range of threats, many of them no longer theoretical. Conclusions on the Current state of deepfakes: • The online presence of deepfake videos is rapidly expanding and most are pornographic. • Deepfake pornography, a global phenomenon supported by significant viewership on several websites, targets women almost exclusively. • Awareness of deepfakes is destabilizing political processes because voters can no longer assume videos of politicians and public figures are real. • Deepfakes are providing cybercriminals with sophisticated new capabilities for social engineering and fraud. Giorgio Patrini is Founder, CEO and Chief Scientist at Deeptrace @deeptracelabs

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THE FAKE ISSUE

Deepfakes are destined to become the latest existential threat to political, cultural and privacy norms.

Deepfakes of Trump, Pelosi & Zuckerberg

Deeptrace, an Amsterdam-based cybersecurity company, detects and monitors AI-generated synthetic media that can disgrace public figures and organizations. deeptracelabs.com

Reality Bytes

could use deepfakes to launch “the next wave of attacks against America and Western democracies.” Political operatives might throw the 2020 presidential election into chaos by creating a digital “October surprise” that could go viral before it’s detected as fake, he said. In October, California became the first state to criminalize the use of deepfakes in political campaign promotion and advertising. California’s law is aimed at political attack ads placed within 60 days of an election. But the concern is global. In mid-December, China announced that its Cyberspace Administration would enforce new laws that ban publication of false information or deepfakes online without disclosure that the post was created with AI or virtual reality (VR) technology. Big tech platforms are stepping up as well. While Twitter has been drafting a deepfake policy, some insiders believe the company’s decision to ban all political advertising stems from a video of House Speaker Nancy Pelosi that was altered to show her slurring during a speech. The video went viral, underscoring the platform’s vulnerability to doctored content. In September, Facebook (FB) donated $10 million in grants and awards to the Deepfakes Detection Challenge, which was established “to spur the industry to create new ways of detecting and preventing media manipulated via AI from being used to mislead others.” Partners in the Challenge, which will run through 2020, include Microsoft (MSFT), Cornell Tech, Massachusetts Institute of Technology, University of Oxford and University of California at Berkeley. As government and tech firms step up to meet the impending threat, deepfake dissemination is expanding beyond the bounds of pornography, notes Giorgio Patrini, the Authentication Economy tech

entrepreneur who founded Deeptrace, a deepfake detection platform. (See “The State of Deepfakes,” p. 21.) Some fear that policing and detection won’t keep pace with the technology’s rapid development. In fact, deepfake pioneer Hao Li, associate professor of computer science at the University of Southern California, recently predicted that manipulated videos that appear “perfectly real” will be accessible to all in less than a year.“It’s going to get to the point where there is no way that we can actually detect [deepfakes] anymore,” he said. “So we will have to take a look at other types of solutions.”

96%

of deepfake videos are pornographic

CONNIVING MISS MAISY A deepfake-generated digital persona was designed to spread disinformation that could deflate the value of Tesla stock In March 2019, someone posing as a Bloomberg journalist named “Maisy Kinsley” connected with more than 195 people on LinkedIn and followed a large number of Tesla short sellers on Twitter. Several of the short sellers claimed the imposter contacted them in an attempt to extract personal information. But Bloomberg has never employed anyone by that name, and the fraudster’s profile picture contained visual anomalies consistent with synthetically generated images. LinkedIn and Twitter have closed the accounts.

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----------------------

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THE FAKE ISSUE

Authentication

Getting Real About The RealReal A consignment marketplace detects fake merchandise, but is its stock price for real?

he RealReal (REAL) has been pioneering the authentication economy for nearly a decade. The company employs a squadron of experts to ensure fakes don’t enter the product mix of designer labels in its luxury consignment marketplace. Its customers are buying secondhand clothes, jewelry, watches and home furnishings, but they demand lightly used merchandise of high quality. To ensure they get it, The RealReal relies on specialists in disciplines as esoteric-sounding as horology (watches) and gemology (gems). The RealReal operates online and has been building physical stores. In 2018, the company facilitated 1.6 million transactions worth $710 million for more than 400,000

Authenticating the provenance of merchandise helps The RealReal claim a larger fee than its competitors receive.

40%

30%

TAKE RATE

REALREAL LEADS PEERS IN TAKE RATE

different buyers. Customers value the service. Buying and selling secondhand luxury goods online presents a challenge because of the proliferation of knockoffs. If, for instance, someone posts a Gucci handbag for sale on eBay (EBAY), it’s difficult—if not impossible—for potential buyers to verify its authenticity. As a result, buyers don’t want to pay full price. So no one wants to sell authentic goods on the platform. This creates a negative feedback loop that ensures most of the luxury goods offered online are fake. The RealReal addresses this problem by authenticating merchandise and handling all elements of the sales process, including photography, pricing, fulfillment and

20%

10%

REAL

ETSY

EBAY

returns. Such extensive services enable the company to retain a significant portion of the money buyers spend. The take rate, the percentage of each order it keeps as a percent of revenue, was 36% in 2018. eBay’s take rate was just 9%, and craft goods marketplace Etsy’s (ETSY) take rate was 15%, as shown in the chart below. The company’s consignment empire has been growing, but its stock price of $17 per share at press time tells a different story. The company had its initial public offering June 28 of last year at $20 per share. The stock reached a high of $28 on its first day of trading before steadily declining during the next two months to a low of $13 per share on Aug. 27. From there, the stock rebounded to $24 per share by the end of October before crashing again to $16 per share on Nov. 21. That wild volatility reflects the key underlying question for The RealReal. Does it have an innovative new business model that has found a profitable niche? Or is the company, whose CEO previously ran Pets.com, destined to crash and burn in the same way? While The RealReal keeps a larger portion of the money spent on its site than its peers, it also spends more to earn that revenue. It pays the cost of authenticating, merchandising,

PHOTOGRAPHS: SHUTTERSTOCK

By David Trainor and Sam McBride

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The Fakery of Consensus Earnings

shipping and accepting returns for all the items it sells. What’s more, many of those costs are not reported in cost of goods sold. Instead, they are reported as “operations and technology” expenses. According to the company’s S-1 filing: “Operations and technology expense principally includes personnel-related costs for employees involved with the authentication, merchandising and fulfillment of goods sold through our online marketplace, as well as our general information technology expense.” Much of that cost relates directly to the delivery of The RealReal service and should be included in cost of revenue. By reporting those costs separately, the company makes its gross margin look higher and presents a potentially misleading picture of its path to profitability. The chart on page 26 shows that The RealReal’s gross margin has remained consistent at ~65% since 2017. However, if operations and technology expense are included as part of the cost of revenue, its “adjusted gross margin” declined from 22% in 2017 to 17% over the trailing 12 months. The RealReal says that it expects operations and technology expenses to decrease as a percentage of revenue over the longer term. That chart also shows they’ve made progress

on that front over the trailing 12 months, but they remain a long way away from getting back to even the 2017 margin, much less the level they need to be to achieve profitability. Overall, the company’s net operating profit after tax (NOPAT) decreased from -$47 million in 2017 to -$66 million in 2018, but its NOPAT margin improved slightly from -35% to -32% at the same time. The RealReal seems like it should have a profitable business model. It fills an underserved niche and has relatively little direct competition. However, the company has yet to show significant concrete progress toward achieving profitability. It’s possible that it’s in a business that’s simply not profitable, which would explain why very little competition has emerged. A beneficial recession? While luxury goods manufacturers struggle during economic downturns, The RealReal’s consignment business could actually benefit from poor economic conditions. Shoppers who normally buy new luxury goods might substitute used merchandise during a recession. The company could also get a large influx of sellers needing extra cash. It’s also possible that the decline in spending on luxury goods during a recession would more than offset

The earnings recession isn’t news. But what most investors don’t know is that core earnings, when adjusted for unusual gains or losses hidden in footnotes, are a lot worse than investors and markets realize. Meanwhile, the S&P 500 has been on a tear this year, up nearly 25% and currently at an all-time high. Those two seemingly inconsistent trends give rise to a question. How do stocks rise when the underlying fundamentals fall? Answer: Most investors aren’t aware of the severe decline in core earnings because they don’t read the footnotes. Over the trailing 12 months, GAAP (generally accepted accounting principles) earnings fell 1% while adjusted core earnings fell 6%. Most investors know GAAP earnings are prone to distortion because they include lots of non-recurring or unusual factors. Most investors aren’t aware that the core earnings (from CompuStat or Wall Street analysts) are also distorted by unusual factors. In fact, earnings for the S&P 500 were distorted by 22% on average in 2018, according to New Constructs, an equity research firm that adjusts data with the aid of machine learning. Earnings distortion from hidden gains is rising rapidly, and core earnings from traditional sources have not been overstated this much since 2000. The rapid rise in earnings distortion since 2015 means that an increasing amount of corporate income is coming from unusual or one-time gains, which is not apparent to investors analyzing press releases or income statements. Corporate managers hide the one-time nature of these gains by disclosing them only in the fine print. In other words, managers are dressing up the numbers in an increasingly aggressive manner over the last few years. —David Trainer and Sam McBride

the substitution effect and become a net negative for the company. As with other recent IPOs, the markets have never seen this company operate during a downturn and thus have no idea how it will perform. Still, investors have reason to hope this company is well-equipped to handle a recession.

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Authentication

Is The RealReal, whose CEO previously ran Pets.com, destined to crash and burn in the same way?

The RealReal reports a dip in gross margins, but adjustments by New Constructs indicate a steeper descent.

David Trainer is CEO of New Constructs, an independent equity research firm that uses machine learning and natural language processing to parse corporate filings and model economic earnings. Sam McBride is an investment analyst at New Constructs. @newconstructs

70%

24% 22%

GROSS MARGIN

DECLINING ADJUSTED GROSS MARGINS

Given that the current NOPAT Margin is -32% and the current valuation implies the company will achieve 12% margins, while also growing revenue by 25% compounded annually for seven years, the best case scenario (or something close to it) is fully priced into the stock. New Constructs rates the stock Unattractive. At the current price of $17 per share, investors should sell. The risk/reward looks poor. The stock price reflects a best-casescenario future, while the business is not close to achieving that future. Too much upside is priced into the current valuation while too much remains because of negative margins. Until the company makes more progress and proves it can achieve margins comparable to its peers, investors should take profits in The RealReal and wait until the company shows it can exceed the already high future cash flow expectations baked into the stock price.

60%

20% 18%

50%

40%

16% Gross Margin Adjusted Gross Margin

14% 12% 10%

30%

2017

2018

TTM

PHOTOGRAPH: SHUTTERSTOCK

High expectations Analysis of the cash flow expectations baked into the current stock price reveals the stock price is high. To justify the current valuation of $17 per share, the company must achieve 12% NOPAT margins (comparable to Etsy) and grow revenue by 25% compounded annually for the next seven years. If The RealReal can grow revenue at the same rate but achieve NOPAT margins of 19% (equal to eBay), the stock is worth $29 per share today, an 80% upside to the current stock price. A 25% compound annual growth rate seems achievable for a company that grew revenue by 52% year-overyear through the first nine months of 2019, so the issue is margins. Given the high take rate, the company should be able to achieve comparable margins to its peers (with some cost controls), in which case the stock is undervalued. However, the poor performance of the stock since its IPO shows that investors are not satisfied with promises and want to see progress toward profitability right now. Too often, investors bid stocks up on the hope the company will be the next FAANG (Facebook, Apple, Amazon, Netflix and Google) stock. “Hope” isn’t a good investment strategy. The FAANG stocks are driven by once-in-a-decade or even once-in-a-generation disruptive technologies.

ADJUSTED GROSS MARGIN

THE FAKE ISSUE

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Reality Bytes

THE FAKE ISSUE

Real Possibilities in Spatial Computing An unprecedented combination of the real and unreal is set to engulf humanity, thanks partly to the spread of spatial computing By Robert Scoble

PHOTOGRAPH COURTESY OF QUALCOMM

Former Microsoft tech evangelist Robert Scoble, no stranger to augmented or virtual reality, today serves as chief strategy officer of spatialcomputing consultant Infinite Retina. He’s perhaps best known for his technology-focused blog, Scobleizer. Luckbox asked him to forecast what’s ahead in 2020 for AR and VR.

et ready to blend the real and the virtual. In the coming decade, spatial computing is poised to change the way people live, work and play. All it requires is putting on an almost normal-looking pair of eyeglasses to connect with super-sophisticated cameras, sensors, computers and the digital cloud. The combination of devices creates a “virtual being”—a digital partner that not only knows where it is in space but also understands a lot about the person using it. The phrase “mixed reality” is tossed around to describe the way spatial computing superimposes

digital creations on the natural world. A blank wall can become a video screen for Hollywood’s latest box office hit. A barren extra bedroom is transformed into a welcoming pub. An utter void is filled by a three-dimensional object that the user can circle to view from different angles. There’s also talk of humans and machines forming “partnerships” to traverse the landscape together and manipulate objects cooperatively via the medium of spatial computing. Digital devices could even serve as prophets, employing prediction engines to foretell the actions of humans and other machines.

A look to the future Qualcomm has introduced a chipset that powers digital displays and seven cameras to create a new form of augmented reality called spatial computing.

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Reality Bytes

Combining these capabilities yields what some view as the birth of something almost alive.

“Cautious investors should keep watch on augmented reality, and aggressive investors may place some bets now.”

Four eyes But back to the eyeglasses. Qualcomm, a chipmaker that licenses other companies to use its patented technology, announced in November that its new chipset will power devices that look a lot like vision-correction glasses but have screens and seven cameras. Qualcomm isn’t alone in conjuring up tech magic in eyewear. Microsoft has already introduced the second version of its HoloLens. Apple has leaked word that it plans to reveal related products by 2022, and Facebook is reportedly working on a similar product. So, what are they seeing with these 21st century spectacles? Well, spatial computing creates a new dimension where humans, robots or virtual/synthetic beings move around as they work or play. The purest forms are augmented and virtual reality (AR and VR), but a new wave of devices is coming in the next one to three years, and that broadens human horizons

and brings new opportunities to investors. Spatial Computing is also at work in robots and autonomous cars, which use similar sensor arrays and artificial intelligence to track objects. Qualcomm, for example, has announced new AI (artificial intelligence) capabilities that detect and identify objects, which will enable developers to add new capabilities to spatial computing applications. Spatial computing can be done on mobile phones, but poorly, because mobile phones aren’t optimized for moving around inside computing. But by the end of this year, new iPhones will arrive with more detailed 3D sensors that will enable developers to add some of these capabilities. Meanwhile, glasses that grant entry to this new world are starting to arrive on the market from companies that include Magic Leap, Nreal and Vuzix. Last month, Qualcomm showed off its new XR2 chipset for a new group of glasses. These new devices, called “XR” for “extended reality,” build upon virtual reality headsets and tech-

nology that’s increasing in popularity. In fact, reviewers included the Oculus Quest in lists of devices of the year for 2019 (see below). Still, newer devices like Oculus Quest, a $400 standalone virtual reality headset, or the $3,500 Microsoft HoloLens, have yet to win over consumers. AR and VR Virtual reality means not seeing the real world and instead moving around in a totally virtualized one. Oculus Quest is one of many competitors at differing price points, but it’s a favorite because of its affordable price and because it’s totally standalone with no PC needed. Most of its competitors require a cord to an expensive PC, which limits their usefulness. Augmented reality allows users to walk around the real world while

59%

of developers believe VR will reach mass adoption in 3-4 years.

OCULUS QUEST Developer: Oculus, acquired by Facebook in 2014 for $2 billion in cash and stock Description: Oculus released Quest last spring as an all-in-one, no-stringsattached approach to VR gaming. That means gamers won’t need a highdollar PC rig to immerse themselves in a consumer-friendly VR experience. One downside to the freedom from wires, however, is a battery that leaves a lot to be desired, clocking in at about two hours of use with each charge. Price: $399 for 64GB; $499 for 128GB Unit Sales: 400,000—SuperData

PHOTOGRAPH: REUTERS/STEPHEN LAM

THE FAKE ISSUE

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seeing virtual items pop up. The best examples include Microsoft’s HoloLens or Magic Leap’s ML1 headset. So, why haven’t sales taken off? Well, the devices are big and ugly. Most are expensive. None come with optics or monitors inside that are good enough for users to read text, and they aren’t comfortable enough or sharp enough to wear to watch a movie. By 2023, that will change due to a new wave of optics and capabilities, thanks to Qualcomm. So, cautious investors should keep watch on this field, and aggressive investors may place some bets now. Really aggressive investors, like Tipatat Chennavasin, along with his partners at TheVRFund, or Josh Wolfe at LUX Capital, have been investing for years. They haven’t found a unicorn yet but were in Beat Games, which just sold to Facebook. Facebook has spent billions and is gearing up to spend even more over the next decade. Its lists of open positions were often hundreds of jobs long. But don’t indulge in FOMO— the fear of missing out. This game has barely begun, and the unicorns probably haven’t been born. The big

players—Facebook, Microsoft, Sony or Apple—are spending billions in R&D and might squash smaller companies. Facebook has already started Horizon, which it bills as a virtual reality world. Other players include Sansar, from the creators of Second Life, and AltSpace VR, which is owned by Microsoft. New kinds of infrastructure companies have been launched. They will need a new kind of cloud computing, one that merges detailed maps, 3D systems from video game producers and data from new kinds of 3D sensors. These “AR Clouds” and companies like 6D.AI are offering new kinds of video games and providing details about the world, thanks to these new systems. Spatial computing is already changing human interaction. Social gaming systems, like RecRoom from Seattle’s Against Gravity, make it possible for sports fans to play basketball over the internet against other people. Practical applications The workplace is changing, too. Thanks to virtual reality, the Magic Leap headset enables users to

How will the VR market change in 2020? Virtual reality (VR) is only beginning to reach its full potential. Each year brings more innovation to VR and its various applications—from gaming and entertainment to education and enterprise. VR appears likely to continue to reach milestones and breakthroughs this year and in the decade ahead. Consumer spending on VR games is expected to more than double in the next four years, and the types of VR content available will increase for every genre to match the spending growth. Outside of gaming or entertainment, VR is increasingly finding a home in the classroom, and the use of VR technology will continue to expand in schools and libraries, where it will transform learning experiences and increase student engagement. Beyond the classroom, VR is changing how workers learn on the job, encouraging active participation and providing hands-on experiences to improve information retention. — Dan O’Brien, head of VIVE Enterprise Solutions, HTC VIVE

HTC VIVE Developers: HTC & Valve Description: The Vive, co-developed by HTC and Valve, is powered by SteamVR. It provides easy access to more than 1,500 virtual reality games on the popular Steam interface that’s already familiar to PC gamers. The device is capable of turning nearly any 11’5” by 11’5” space into a fully immersive virtual world to explore. Price: $499 Unit Sales: 1.3 Million—SuperData

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THE FAKE ISSUE

“The AR unicorns probably haven’t been born. The big players— Facebook, Microsoft, Sony or Apple—are spending billions in R&D and might squash smaller companies.”

Reality Bytes

collaborate remotely with co-workers. They can manipulate 3D items on top of the real world while seeing colleagues just as they would if they were meeting in real life. Working in 3D will also help employers and employees to visualize business data with help from Virtualitics. BadVR enables workers and managers to walk around a virtualized factory floor in a Magic Leap headset and see how well everything is working in real time. The technology also helps to train workers how the plants operate. It can even redesign the floors to maximize the space and layout. Health care will change profoundly as spatial computing proliferates. MediView, for instance, guides surgeons as they move cutting tools into cancer tumors, thanks to its system and a Microsoft HoloLens. In the schools, MergeVR has sold millions of augmented reality cubes to teachers who use their product to augment lesson plans. In one example, a user aims a phone or tablet at a spinning cube that creates a virtual solar system on the device. Retailers are using spatial computing, particularly for training. Walmart, for example, bought tens of thousands of VR headsets to perform training created by STRIVR. It credits that training with saving lives during a shooting in one of its stores, and with improving customer experience too. Realtors are showing properties with the help of SpatialFirst, which enables potential buyers to take virtual walks around commercial real estate. Today it’s on mobile phones, and it will soon become available for other devices.

Robert Scoble’s 8 Predictions for 2020 A new wave of VR devices will arrive. They’ll have sharper screens, better user interface and new functions made possible by new eye sensors. It will happen this year on the high end of the market with devices like Varjo’s $10,000 unit. On the inexpensive side of the market, similar innovations will come to Facebook’s Oculus Quest in 2021. 1

New mobile phones will reach the market. They’ll have 3D sensors and better augmented reality functions. 2

Qualcomm will announce a new set of mixed-reality devices that use its seven cameras. They might not ship until 2021. 3

A new range of tools that will make creation easier. They’ll come from small companies like Torch, which makes an AR toolset for mobile phones, and Varjo, which will ship a new VR toolkit for enterprise developers, as well as from bigger companies like Adobe. Already, car designers and architects are using these tools. 4

The 5G story and toolkit will come together with mobile phones to support new kinds of AR and VR, as well as other important pieces that will use the high-bandwidth, low-latency capabilities of 5G. 5

New kinds of collaborative games, experiences and systems will make Pokemon GO seam quaint.

Spatial computing will help capture the action at the 2020 Summer Olympics in Tokyo with startling realism that will raise awareness to the technology. 7

The cost of creating new 3D-centric applications will come down, paving the way for Hollywood to create new forms of entertainment by 2025, including virtual beings that will assist and interact with audiences. 8

Robert Scoble, a strategist and researcher in spatial computing, has cowritten three books that predict decade-long trends. The latest, The Fourth Transformation, describes the many ways that augmented reality will transform computing.

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THE FAKE ISSUE

Reality Bytes

Jeri Ellsworth on Augmented Reality Tilt Five’s CEO Jeri Ellsworth discusses what consumers should expect from the future of AR. Silicon Valley’s Jeri Ellsworth was the first team member hired into the hardware research and development department of the renowned video game company Valve, known for hit titles such as Counter-Strike, Half-Life and Team Fortress 2. She went on in 2013 to found castAR, an AR hardware and software platform, and today serves as CEO of Tilt Five, a company whose glasses are designed to bring tabletop games to life with the power of AR. Tilt Five hit crowdfunding site Kickstarter with a modest goal of $450,000, yet raised well over $1.7 million from over 3,000 backers when the campaign ended last October. Ellsworth sat with Luckbox to talk about Tilt Five and what consumers should expect from the future of AR. —Mike Reddy

Why should people care about augmented reality?

Well, for many years we’ve been using our 2D screens, and they’re great, but there are some limitations. It’s oftentimes very difficult to use them to collaborate because you have to group around a little tiny screen. They’re often isolating and they’re often inefficient at expressing 3D information. We live in a 3D world, and we move about our 3D world and we pick things up and move things around, yet all of our computing is stuck on this 2D screen. The cool thing about augmented reality is it brings the user very intimately up close to the information or the game or application that they’re using. So, you interact with it in a very intuitive way. If I want to move a game character, I can just push that game character with my finger—as if you were pushing a coffee cup across the table. If I want more information or want to look at the other angle of a particular game character, I could just stand up and walk to the other side of the table or lean in and sit a lot closer to get more detail. It’s just more of an intuitive, blended type of experience for computing. Is the AR experience approachable because it’s so intuitive?

Absolutely. For a lot of testing that I do on our system, I actually have my father [participate]. He’s an auto mechanic, and he’s not completely tech un-savvy, but he’s definitely not a computer whiz. And so, parts of our system were designed around folks like him. We have a wand, a magic wand— something that you can reach into this 3D space and poke things with. And our theory behind that—and it’s become true—is everyone knows how to poke things with a stick. So yes, it’ll be more intuitive for the average user because it will just be closer to what they’re doing with the rest of their life. AR is known for gaming applications, but how will it be integrated more broadly into daily life?

In the press, you see a lot more news articles about the gaming and entertainment spaces because they’re super relatable. I believe that’s why you see Pokemon GO. Our product resonated really well because it was entertainmentbased. But there’s a lot of utility that’s emerging right now in the more professional spaces. AR is getting a lot of traction in warehouse management, virtual assistance, working on jet engines and complex machinery. I think those are really interesting examples of using AR for more

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Tilt Five’s augmented reality glasses being used to play a game on a holographic tabletop

utility in less-exciting ways. It’s almost like we’re going into this phase with the smartphone, where there were a couple of killer apps—a thousand songs in your pocket, the internet in your pocket—and I think for AR, there’s going to be utilities like that that’re really going to drive home the mass market adoption. When will we begin seeing widespread adoption of AR technology?

I think it’s going to take a good part of a decade because there are some really tough challenges. It’s kind of like the early days of home computers. Home computers were touted as likely to completely change the way you do everything, but really it broke down into a couple of applications. Games were one of those, and super popular. Then it was the spreadsheet, and the word processor was the other really killer app. And so, I think we’re going to

hear a lot of hype around “it’s going to completely change the way we do everything in our life,” but it’s really going to take a decade or more for that to happen. Do any companies have a proprietary edge in AR that inspires you or that you particularly appreciate?

I think Microsoft has been leading the charge in this space for quite some time. Several years ago, they came out with their press releases—they were going to do the HoloLens. It was, in my opinion, very hype-y, and it was oversold, but they quickly realized the limitations of the technology they created. They focused on professional-use cases for their system, and they’re getting a lot of traction in that. They found a place for the current state of the technology, and they’ve been keeping it very realistic up to this point about what the technology can do and just

incrementally improving on it. The Kickstarter campaign was a great success. So what’s next for Tilt Five?

We’ve been working overtime with game developers and making sure we have a content pipeline—more than just launch titles, but that we have a constant cadence after we launch. And so our objective is to start off with a pretty modest number of units, learn from that and just keep growing. We’re looking at 2021 as our year to start pushing really hard to see if we can get this mass market product.

“AR is going to arrive because of companies that find a really strong niche and then incrementally improve.”

Final thoughts?

My stance is AR is going to arrive because of companies that find a really strong niche and then incrementally improve. Companies like Magic Leap come to mind [that have] taken billions of dollars and kind of fallen flat. It’s really hard when you try to do everything at once.

Jeri Ellsworth

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trends life, luxury & the pursuit of happiness

GAME THEORY

Wrestling With Reality

PHOTOGRAPH: JB AUTISSIER/PANORAMIC VIA REUTERS

Spontaneous or scripted? The pros sometimes improvise on a predetermined storyline to create a crowd-pleasing spectacle.

A member of the Lucha House Party team (center) battles the Singh brothers in a WWE SmackDown match last spring in Paris.

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trends

edneck soap opera. Populist performance art. Repressed homoerotic fantasy. Whatever it’s called, professional wrestling is nothing if not compelling. The characters are myriad, the spectacle is grand and the drama is fierce. Whether fans believe it’s 100% true (it’s not) or 100% fake (it’s not that, either), there’s no debating the broad appeal of an entertainment odyssey that rakes in hundreds of millions of dollars every year. Wrestling’s relationship with reality has always been as fluid as the high-flying luchadors, Mexican pro wrestlers known for aerial maneuvers and garish facemasks. The inner workings were revealed as far back as the early 1900s, when Karl Gotch dominated George Hackenschmidt in a rematch. Their second bout bore little resemblance to their original two-hour bout. Gotch, exploiting his opponent’s knee injury, broke kayfabe (slang for what’s supposed to be real) to defeat Hackenschmidt in 30 minutes. The record-setting crowd of 30,000 was not pleased. For the next century or so, interest in the sport waxed and waned, mostly through small regional organizations. The inevitable mergers occurred, and by the ‘80s two major players survived: Ted Turner’s World

Championship Wrestling (WCW) and Vince McMahon’s World Wrestling Entertainment (WWE), which was formerly called the World Wrestling Federation (WWF). The illusion of truth took a major hit in a 1989 New Jersey Senate hearing, when legislators, in an effort to avoid regulation, described wrestling as “entertainment ... rather than ... a bona fide athletic contest.” That made fakery official and began a transformation that eventually pushed wrestlers to dress as mummies, brandish supposedly poisonous snakes, bury their rivals alive and rise from the dead with the help of a lightning bolt. With such a brazen demand for suspension of disbelief, what was left to be real? The skills The physical training required for pro wrestling can be brutal. Wrestlers have to develop the strength to toss around a usually cooperative but still massive opponent. They learn enough acrobatics to bounce around the ring like crazed gymnasts. They absorb blows and take falls that would challenge even a Hollywood stunt double. Acting talent pays off. To advance the storyline of a match, wrestlers

may fake an injury or stoically mask the pain of a wound that’s real. They can take hold of the microphone and hold forth in mock interviews, lending an air of reality to their latest rivalry. Wrestlers have to become masters of improvisation. Even when the outcome of a match is predetermined, no one necessarily maps out a plan to get there. It takes inventiveness to discover ways to keep the plot alive. The drama sometimes rises to the level of spectacle. Wrestlers learn to make big entrances and exits, sparking and holding the interest of enormous crowds. Their characters take on the characteristics and proportions of comic book super heroes and villains, complete with alter egos that mutate as their careers evolve. The injuries Everyone expects wrestlers to keep finding new ways to push physical

Professional wrestlers know enough acrobatics to bounce around the ring like crazed gymnasts. They absorb blows and take falls that would challenge a Hollywood stunt double.

SH*T GOT REAL

When accidents, spontaneous interviews, rogue rebellions, or anything unscripted happens, it is called a shoot. When it’s actually written to appear that way, it’s called a work. Here are some of the most important ones from across the years.

1911 Karl Gotch overwhelms George Hackenschmidt in a rematch built up as a clash of titans.

1982 A David Letterman interview with comedian Andy Kaufman and wrestler Jerry Lawler escalates to expletives and physical violence.

1984 “Dr. D” (David Schultz) attacks 20/20 journalist John Stossel after Stossel tells Schultz wrestling is fake.

1987 Storyline rivals “Hacksaw” Jim Duggan and The Iron Sheik are outed as real-life friends when they’re arrested together for driving with an open alcohol container and possession of marijuana and cocaine.

1988 José González stabs Bruiser Brody in a backstage locker room, leading to Brody’s death.

1989 In a bid for deregulation, WWE representatives testify in a New Jersey Senate hearing that wrestling is entertainment, not a sport.

1994 A federal trial over rampant steroid use rocks the wrestling world.

1996 After wrestling as rivals, Kevin Nash, Scott Hall, Triple H and Shawn Michaels share a group hug that became known as “The Curtain Call.”

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trends

boundaries, and that makes injury all but inevitable. Wrestlers power through pain because the show is live and must go on. The abuse ranges from the freakish to the tragic. Vince McMahon, for example, tore both his quads during a benign ring entrance. Mick Foley, who once finished a match after having his ear ripped off, went home from 1998’s Hell in a Cell with a concussion, a dislocated jaw, a bruised kidney, a hole in his mouth, a body full of thumbtack punctures and two missing teeth. Owen Hart wasn’t so lucky—a stunt malfunction claimed his life in 1999. It’s little wonder so many wrestlers fall into drug abuse and early death. The money The WWE has grown into a market behemoth through advantageous acquisitions, ruthless employment strategy and savvy media deals. It bought and phased out its two largest competitors, World Championship Wrestling (WCW) and Extreme Championship Wrestling. Its stock skyrocketed nearly 400% after it renegotiated broadcast rights with Comcast and Fox in April of 2018. Although WWE has been a juggernaut for decades, change is begin-

1996 A 17-year-old aspiring wrestler lies about his age to get into a match and suffers two severed arteries when he’s “bladed” too deeply.

1997 Fan favorite Bret Hart loses the WWE championship when Vince McMahon and Shawn Michaels go off script in what’s now known as the Montreal Screwjob.

ning to take hold. In the last few months, attendance has been slipping and stock prices have been falling. A new organization, All Elite Wrestling (AEW), has been founded by Tony Khan, son of billionaire Shahid Khan, and has been challenging WWE for television ratings. Part of the problem for WWE comes down to labor disputes. WWE wrestlers, in violation of federal law, work as independent contractors. They are expected to buy their own insurance (Lloyd’s of London stopped insuring them in 2017) and to provide their own transportation between cities. Fans have begun to view the WWE as predatory because of its cavalier treatment of its stars. Meanwhile, the AEW seems to be more in touch with the people who buy the tickets. Although it hasn’t adopted a formal policy, the AEW has begun creating full-time employment status, with benefits, for some of its top-tier wrestlers. If it continues along that path, sentiment toward the AEW will only grow more positive. That could translate into some real change in the market. Bobby Shepherd, creative director for tastytrade, considers himself a bourbon, banjo and body slam enthusiast.

1999 Owen Hart plummets 78 feet to his death in a live payper-view event when equipment malfunctions.

2007 A bizarre fictional storyline in which Vince McMahon has been “murdered” is abruptly ended when wrestler Chris Benoit is found dead by suicide in his home after killing his wife and son.

THE VERY REAL CHINLOCK In spring 1985, when the World Wrestling Federation hype machine was making the media rounds for the debut of its new WrestleMania, a difference of opinion between wrestler Hulk Hogan and actor and media personality Richard Belzer took a very real and nearly disastrous turn on live television. Hogan appeared on a talk show called Hot Properties. It was hosted by Richard Belzer, who later became known for his role on Law and Order: SVU. During the interview with Hogan, Belzer stopped short of calling wrestling “fake,” but suggested the matches weren’t unduly dangerous. During a physical demonstration, Hogan put Belzer in a front chinlock, cutting off circulation to his head. Belzer passed out and when Hogan let go, Belzer’s head hit the floor and a pool of blood started to form. Belzer was hospitalized and received stitches. He sued Hogan for $5 million and settled out of court.

2011 Sting (the wrestler, not the musician) quickly ends a match with Jeff Hardy, who had arrived to the ring in an obvious state of intoxication.

2011 CM Punk delivers his “pipebomb” speech on live TV, airing his grievances with the WWE, revealing the group’s deep internal politics, and announcing he will leave the group while still champion.

2012 Gawker releases a sex tape of Hulk Hogan, exposing the previously kid-friendly hero’s affair and showing him using racial slurs to describe his daughter’s boyfriend.

2019 Ronda Rousey repeatedly breaks the fourth wall in her Twitter feud with rival Becky Lynch, calling Lynch by her real name and denouncing her finishing move—a maneuver used near the end of a match—as fake.

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trends

GAME THEORY

The Greatest Tennis Player of All Time Three tennis players who are candidates for GOAT—greatest of all time— have faced each other repeatedly. Luckbox picks the best. By Andrew Prochnow

OAT, which stands for “greatest of all time,” is usually applied to sports. But choosing the GOAT inevitably leads to controversy. Who’s better—Babe Ruth or Barry Bonds? Michael Jordan or LeBron James? Tom Brady or Joe Montana? Joe Louis or Muhammad Ali? Mario Andretti or Michael Schumacher? Man O’ War or Secretariat? The passage of time has made it impossible to conduct direct matchups of some of those and other potential GOATs. In one example, Ruth died in 1948, and Bonds was born in 1964. But in tennis that’s arguably not the case. Three of the all-time greats—Roger Federer, Novak Djokovic and Rafael Nadal— have faced each other numerous times and are still playing. Djokovic and Nadal have played 54 matches, and it’s nearly a dead heat. Djokovic is leading 28-26. Federer and Nadal have met on the court 40 times, with Nadal emerging victorious 24 times, besting Federer’s 16 wins. Federer and Djokovic have nearly split their 49 matches, with Djokovic leading 26-23. Those three players and other tennis greats qualify for consideration as the GOAT player, but analysts agree that Djokovic and Nadal are probably competing in the sport’s GOAT rivalry. The pair has played each other an incredible number of times, the matches have been spectacular and the two players are less than a year apart in age. The Djokovic-Nadal competition was particularly hard-fought in 2019. They evenly split the four majors, and Nadal only managed to edge out Djokovic to clinch the year’s No. 1 ranking during the final tournament of

the year, the Nitto ATP Finals in London. While Djokovic and Nadal were eliminated during the round robin stage in London— partly because of exhaustion from a long year— it was Djokovic who needed favorable results in London and couldn’t find them. Djokovic was knocked out of the race for No. 1 by a familiar nemesis—none other than Federer. Had Djokovic won that match, and gone on to win the tournament, he would have cemented his sixth year-end No. 1 trophy and tied with the record holder in that category, Pete Sampras. Instead, Nadal’s ascension to No. 1 at the end of 2019 means that each of the so-called “Big 3” players—Nadal, Djokovic and Federer—have now earned that honor on five occasions. A situation that long-time player, coach and analyst Patrick McEnroe referred to as “justice.” Aside from the end-of-year rankings, some tectonic shifts in the GOAT narrative occurred during 2019. Taking home two Slam trophies, Nadal now sits only one major behind Federer in the record books of tennis history—a distinction many view as the most prestigious in the game. Age matters For a large percentage of tennis fans, the fact that Federer still holds the all-time record for Slam titles (in the men’s game) is evidence enough that he’s the sport’s GOAT. But for others, the line between the accomplishments of Nadal and Federer is blurred, considering what Nadal has achieved through the age of 33½, compared with what Federer had achieved by that age. For example, at 33½

years old, Federer had claimed 17 majors, two fewer than Nadal’s tally. Also note that since turning 30, Nadal has twice (2017 and 2019) achieved the year-end No. 1 designation. Nadal holds the record as the oldest-ever year-end No. 1 in tennis history (33½). The last time Federer was ranked No. 1 to end a season was a decade ago, when he was 28 years old. Assume for a moment that Slam titles and year-end No. 1 designations aren’t the only relevant achievements for GOAT. Further assume the GOAT designation even makes sense when comparing players from different eras. Moving beyond that limitation, what does the historical data indicate regarding the careers of Federer and Nadal? The table on the facing page suggests their “GOAT race” remains extremely tight. Just remember Federer is five years older than Nadal, and six years older than another GOAT candidate, Djokovic. A “final” analysis can’t be conducted until all of the Big 3 retire. Federer remains the all-time record holder on the men’s side of the game with 20 Slam titles. However, the fact that Nadal holds 19 majors and is five years younger than Federer would suggest that lead is tenuous. Besides, Nadal holds the record for the most Masters 1000 titles in tennis history and leads Federer by a considerable margin in that category. The Masters 1000 includes an annual series of nine tournaments held around the world which constitutes the level immediately below the Grand Slams. Nadal has taken home seven more Masters 1000 trophies than Federer despite the fact that he is five years younger.

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trends

PHOTOGRAPHS: (FEDERER) REUTERS/EDGARD GARRIDO; (NADAL) REUTERS/SUSANA VERA

The nine Masters 1000 include six hardcourt tournaments and three clay tournaments. Given that Federer is widely considered one of the best-ever players on hardcourt, that theoretically means the he would have had more “good” chances to bring home a title at that level than Nadal. Nadal’s known as “The King of Clay” for his prowess on that surface, but still leads in the category. Head-to-head In their head-to-head meetings, Nadal leads comfortably, both overall (24-16) and in the Grand Slams (10-4). In the majors, Nadal and Federer have won on their favored surfaces. The Spaniard (Nadal) is 6-0 against Federer at the French Open, while the Swiss Maestro (Federer) is 3-1 against Nadal at Wimbledon. However, on the more neutral hardcourt surface, Nadal leads Federer 3-1. These four hardcourt matches were all contested at the Australian Open, as the two have never faced each other at the U.S. Open. Nadal and Federer have both ended the year 11 times as either No. 1 or No. 2 in the world. Federer leads in number of weeks at No. 1 but, once again, he’s five years older. Federer has produced an astounding six titles at the Tour Finals, but it’s a roundrobin tournament contested indoors. Likewise, while Nadal has helped lead Spain to five Davis Cup titles, that’s a team competition and Spain tends to field a much deeper team than Switzerland. Federer and Nadal have both won Olympic gold in doubles competition. But Nadal has won the so-called “career Golden Slam” that includes winning all four majors at least once, as well as an Olympic gold medal in singles. The only other male player to achieve that feat is Andre Agassi. The Swiss Maestro once reached 10 consecutive Grand Slam finals. Nadal remains the only player in tennis history to win a major on grass, clay and hardcourt in the same calendar year (2010). Rod Laver won all four majors during two different calendar seasons, which is referred to as the “calendar Grand Slam.” However, Laver notched these accomplishments before the introduction of hardcourt at the Grand Slam level. That means Laver won three majors on grass, and one on clay, during the two years in which he completed the calendar Slam. Since the introduction of hardcourt at the U.S. Open (and later at the Australian Open) Nadal is the only player to win a Slam on all three surfaces in the same calendar year (a.k.a.

Roger Federer

the ”Surface Slam.”) Nadal is also the youngest player in the Open Era to achieve the career Grand Slam, meaning he won all four majors at least once at the youngest age. There’s a solid argument that Nadal has already edged ahead of Federer in the GOAT race. Even without the overall Slam record, Nadal’s achievements at the age of 33½ have clearly been more impressive than what Federer accomplished by the same age. Interestingly, Federer himself suggested recently that the Spaniard “is going to go down as maybe the greatest player of all time. He’s that good of course.” Luckbox is picking Nadal, but regardless of where one stands on this GOAT debate, there’s no denying that results from 2020 could go a long way in pushing the final decision in one direction or the other. That’s why the next tennis season might be the most-anticipated of all time. Still, Djokovic—with victories in 16 majors— could ultimately edge both Nadal and Federer for the “GOAT” designation. The 2020 season may go a long way in deciding that, too. Andrew Prochnow, a longtime options trader, has written extensively on pro tennis and contributed articles to Bleacher Report and Yahoo! Sports.

Rafael Nadal

Reelin’ in the Years At 33½, Rafael Nadal has won 19 majors—two more than Roger Federer had won by that age. Nadal

Federer

Overall Winning Percentage

83.2%*

82.1%

Grand Slam Titles

20*

Masters 1000 Titles

35*

Olympic Gold Medal (singles)

Year-End #1 Trophies

Year-End #2 Designations

Weeks Ranked #1

202

310*

Head-to-Head (all matches)

24-16

16-24

Head-to-Head (in majors)

10-4

4-10

Davis Cup Titles

Tour Finals Titles

Record vs. Big 3 (all matches)

50-44

39-50

Record vs. Big 3 (in majors)

19-10

10-20

*Denotes all-time record

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THE POKER TRADE

Bluffing Is Real

Blurring the line between real and fake can help a savvy player steal some pots By Jonathan Little

n poker, investing and life, things are not always as they appear. In poker, it’s often because of bluffing. Most poker players, especially those who frequent small-stakes cash games and tournaments, think the optimal winning strategy is rigid, tight and aggressive. They win most pots that belong to them, plus a few more when their opponents play poorly. This strategy keeps variance low and provides an edge, but that edge remains consistently small. Against opponents who aren’t world-class—which includes nearly everyone—a player will win significantly more money by playing in a manner that exploits suboptimal tendencies. That usually means getting maximum value from premium hands, as many recreational players already know how to do, but also by stealing undeserved pots. Don’t get the idea that playing in a generally tight, aggressive style is bad. The problem is that this straightforward strategy does not exploit other tight, aggressive players. Almost every poker player has studied one of the now-outdated books that advocate playing mostly premium hands. These players are good at being patient and getting paid off when they are fortunate enough to make the nuts against their oblivious opponents. These sporadic large wins are enough to beat the worst players in the small stakes games for a small amount. As players move up in stakes, they face fewer and fewer bad players. Most middle and high stakes players strive to ensure they do not make the blunders that the worst players make. This desire to avoid appearing dumb

opens the door for a savvy player to steal pots when tight, aggressive players don’t have a strong hand. In graphs of winning online poker players, tracking programs display a green line (the total profit), a red line (the non-showdown winnings) and a blue line (the showdown winnings).

(See “Color coded,” below.) Most winning small stakes players have a highly positive blue line (when they go to showdown) and a breakeven or negative red line (when they win by making their opponents fold). This implies that to beat the worst players, it’s good to play tightly (giving

Color coded In graphs of winning online poker players, tracking programs display a green line (the total profit), a red line (the non-showdown winnings) and a blue line (the showdown winnings).

Figure out when an opponent’s checks indicate weakness, and then apply enough pressure to make him fold the vast majority of his range.

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up small pots and letting the red line go negative) and get paid off with premium hands (making for a largely positive blue line). Those who win at the middle and high stakes games often have a similar, but inverse, graph, with a positive red line and a negative or break-even blue line. These players win by making their opponents fold incorrectly, meaning they bluff successfully much more often. When they happen to play large pots, they will frequently be an underdog but they steal enough small pots to more than make up for their losses. In general, players have a point in the hand where they act in an honest manner, which implies that point is where they expect an opponent to act in an honest manner, betting on strong hands and checking with marginal and weak hands. Some players act honestly as soon as they put a chip in the pot. They raise their strong hands, limp their marginal

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hands and fold their junk. Others raise preflop with all hands they deem respectable but then only continuation bet the flop when they have what they believe to be a strong holding. Many players in today’s game continuation bet the flop with a wide range but then play the turn in an honest manner, only betting when they are confident they have the best hand, opting to check with their trash and marginal hands. More maniacal players are willing to play in an aggressive manner all the way to the river. With all of those players, figure out when their checks indicate weakness and then apply enough pressure to make them fold the vast majority of their range. Jonathan Little, a professional poker player and WPT Player of the Year, has amassed more than $7 million in live tournament winnings, written 14 best-selling books and teaches at PokerCoaching.com. @jonathanlittle

BLUFFING PAYS Q: How often does a bluff need to succeed to be profitable?

A: A bluff needs to succeed more than bet/(bet + pot) to be profitable. 15% pot bet

➜

13%

25% pot bet

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20%

33% pot bet

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25%

50% pot bet

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33%

67% pot bet

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40%

75% pot bet

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43%

100% pot bet

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50%

150% pot bet

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60%

200% pot bet

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67%

300% pot bet

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75%

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ARTS & MEDIA

RICHARD JEWELL establishing how lovable and hardworking, albeit socially awkward, Jewell (Paul Walter Hauser) was. The easily bullied Jewell lived with his mother, Bobi (Kathy Bates), and harbored a passionate desire to work in law enforcement. But that deep-rooted obsession with police work led the FBI to shoehorn Jewell into the “lone bomber” criminal profile, making him the primary suspect. What followed was a string of ethical and legal missteps by the FBI and the press that would transform Jewell’s public persona from revered to reviled, while pulling everyone he held dear into the nightmare. The FBI, pressured by the media circus, felt obliged to charge him. The media, depicted in the film as a bloodthirsty, self-interested mob, were more than happy to persecute him. The film demonstrates the painful results, while also offering a clear message: Jewell’s biggest mistake was trusting the powerful institutions of law enforcement and government. Both let him down. It’s a message that couldn’t have been conveyed without lambasting

the lack of ethics journalists displayed in their coverage. But the film is cheapened because it’s guilty of what it so fervently sought to critique: It baselessly presented a real-life person in a false light, damaging that person’s reputation. The movie targeted the late AJC reporter Kathy Scruggs (Olivia Wilde), who was shown offering to sleep with an FBI agent (Jon Hamm) for a scoop on the case. But there’s no evidence to support that attack on Scruggs. The lazy trope of reporters trading sex for stories is not only tired—it debased what would otherwise have been a mustsee movie, giving a mostly enjoyable film a sour, hypocritical aftertaste. —Mike Reddy

HATE INC.

sensibilities to interfere with his passion for digging up the truth. Despite his liberal leanings, Taibbi (who authored bestseller Insane Clown President in 2017) follows where the facts lead—as illustrated by his damning indictment of the media’s role in promoting Russiagate hysteria, and calling out a compromised FBI and complicit media on the heels of the Horowitz report.

In Hate Inc., Taibbi chides fellow journalists who don’t operate that way. From Sean Hannity on Fox News to Rachel Maddow on MSNBC, few escape his barbs. He decries their slavish adherence to ideology and tendency to promote the news like sports—where every fan has a team and the opposition deserves to be hated. After all, it’s showbusiness, and that’s where the profits lie. —Jeff Joseph

Matt Taibbi—an author and Rolling Stone political writer who’s sometimes pegged as a spiritual heir to Hunter S. Thompson—has scored again with his latest book, Hate Inc.: Why Today’s Media Makes Us Despise One Another. Taibbi’s the kind of journalist who doesn’t allow his own political

FBI agents question bombing suspect Richard Jewell in a dramatization that includes an unfortunate lie.

RICHARD JEWELL

4 out of 5 An otherwise praiseworthy film unjustly attacks a reporter

HATE INC.: WHY TODAY’S MEDIA MAKES US DESPISE ONE ANOTHER

4.5 out of 5 A refreshingly objective journalist decries bias

PHOTOGRAPH: (JEWELL) CLAIRE FOLGER/WARNER BROS.; (HATE) COURTESY OF VENDOR

The story of Richard Jewell, the security guard who discovered an explosives-filled backpack during the 1996 Summer Olympic Games in Atlanta, is once again captivating the nation—this time because of Clint Eastwood’s new biographical drama. Jewell’s actions on the night of the bombing were initially credited with saving countless lives, elevating him to national-hero status. But his glory was short-lived. An Atlanta Journal-Constitution story, which ran a mere three days after the explosion, revealed that Jewell was a suspect in the FBI’s investigation. The news triggered a media frenzy that would touch nearly every aspect of the man’s life. For many, Jewell’s story isn’t a distant memory. Journalism professors use it as a case study to demonstrate just how powerful, and destructive, the press can be. For Eastwood, telling the story offered an opportunity to vindicate a man on the silver screen, a man who was guilty only of doing his job. The director wastes no time

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LIQUID ASSETS

White Noise

The spirits business is basically brown or white. And lately, white spirits—such as gin, vodka, tequila and mezcal—have been on a roll. Sales of white spirits grew by 8% last year, while brown declined 12%, according to premium distilled spirits supplier MGP Ingredients (MGPI). Luckbox looks at some of the white spirits making noise. By Jeff Joseph Fourteen botanicals contribute to the distinctive flavor profile of Roku, an exceptional Japanese gin. It includes notes of cherry blossom, green and earl grey teas, citrus, and smoke—with a delicate wormwood finish. Best enjoyed neat. $22, suntory.com. Sure, it comes in a beautiful bottle, but Michael Jordan’s Cincoro Tequila, the latest celebrity-driven ego trip to the spirits world, tastes like tequila candy. Eventually, the cake-batter sweetness gives way to a medicine-like finish. Style over substance. $69, cincoro.com. Potocki ranks among Luckbox’s all-time favorite vodkas. Distilled twice and not charcoal-filtered, this Polish artisanal rye vodka has a lot of flavors—caramel, nutty and buttery. Substance over style. $39, potockivodka.com.

PHOTOGRAPH BY GARRETT ROODBERGEN

Mezcal, the smokier, hotter cousin of tequila, is distilled from more than 30 types of agave and cooked in a covered underground pit. Prolijo Mezcal Artisanal Blanco is hand made in Oaxaca, Mexico. A high-proof spirit that deserves to be savored. $45, prolijomezcal.com. Neft vodka has earned Double Gold medals two years in a row in the prestigious San Francisco World Spirits Competition. An ultrapremium vodka crafted in Austria, it incorporates four types of non-GMO rye, and it’s made using pristine Alpine spring water. Killer packaging and, yes, neft means “oil” in Russian. $39, neftvodka.com.

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THE NORMAL DEVIATE

Options Trading: An Antidote for Division Smart options traders know that life—and markets—aren’t zero-sum games By Tom Preston

hen two people look at the same event or data and come to completely different conclusions, they’re setting up for conflict. When President Donald Trump makes a decision, some see it as an act of injustice, or even a crime. Others view it as fulfilling the duty of the office. The formula’s simple. One decision + two vastly different interpretations = anger. In a framework of winning and losing, only one side wins. That means the other interpretation loses, and nobody wants that fate. The theory of loss aversion says that the pain of losing is greater than the joy of winning. So, Americans yell, scream and type with all caps to avoid losing, oblivious to the idea that both sides could be right, or wrong. This is the source of the battle between fake and real news, even augmented versus experienced reality. When the emotional stakes are high, it’s easy for one side to create a fictitious story just to score points on the other side, and why some people label any story they don’t like as “fake.” But here’s a truth about trading that can set everyone free: the news doesn’t matter. In trading, two people can look at a stock

or index, read the same news, look at the same chart, analyze the same fundamental data, and one might see a bullish trade while the other sees a bearish trade. But both can be profitable. What? Do the math Sure, in the grand scheme of trading, it’s a zero-sum game, particularly in the new world of zero-commissions. If one investor buys 100 shares of Twitter (TWTR) at $30 and another shorts those 100 shares of TWTR at $30, and TWTR does anything but sit at $30, neither investor will gain nor lose money. If it goes up to $31, the first investor wins, and the second one loses. If it goes down to $29, the first investor loses, and the second wins. That, indeed, is a zero-sum, 50-50 bet. But imagine if the first investor sold the 27/28 put spread (a bullish trade) and took in .30 credit instead of buying stock, and the second investor sold the 32/33 call spread (a bearish trade) and took in .30 credit instead of shorting stock. If Twitter is $31 at the options’ expiration, the first investor makes $30 and the second makes $30. If Twitter is $29 at expiration, the first investor makes $30 and the second

Counter-protestors clashed with police during a rightwing rally last July in Washington. Could embracing opposites help quell the nation’s anger?

PHOTOGRAPH: REUTERS/BRYAN WOOLSTON

Trading can bring the country back together. That’s right. Trading. Anyone can see all the anger out there. Over politics, culture, religion. Most “leaders” seem powerless to overcome it, and some even seem to revel in it. But to understand how trading can ease this nation’s— and the world’s—raw nerves, consider a big reason for how the country got here: differing interpretations of news.

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Here’s a truth about trading that can set everyone free: the news doesn’t matter.

makes $30. Hmm, only one had the correct directional opinion of Twitter, but both make money. The first investor’s bullish assumption would be correct if Twitter rose to $31, but the second investor’s bearish assumption would be correct if Twitter dropped to $29. But with TWTR at either $31 or $29 at the options’ expiration, both the short 27/28 put spread and the short 32/33 call spread expire worthless, and both investors keep that $30 credit. The first investor’s happy. The second’s happy, too. Magic? No, just probabilities. Both the short put vertical and the short call vertical have theoretical 70% probabilities of making a profit at expiration. Compared to a 50% probability of making money on long or short stock, that may not seem much higher. In terms of trad-

ing success over time, though, that increased probability of profit can mean everything. Plus, those probabilities aren’t based on any single opinion, but rather the cumulative buying and selling of hundreds of thousands of market participants.

The right way Using smart options strategies that have high probabilities of making money, investors are breaking free from the binary thinking of winner versus loser. That way of thinking stinks for trading and is making the country angry. Of course, any trade can lose money, even if it has a high probability of profit. But investors can quantify why it lost money— the stock went up higher or down lower than the market anticipated, or it didn’t move enough before the option expired, or volatility went up or down. The investor isn’t the reason the trade lost money. It lost money because of the random nature of markets that give even the most sound trading strategies an occasional loser. In fact, trading can provide an entirely different perspective on the events of the day. Take trading seriously and treat the news as a hobby, without the bloodthirsty need to be “right.” It will pad the bank account and lower the blood pressure. Tom Preston, Luckbox features editor, is the purveyor of all things probability-based and the poster boy for a standard normal deviate.

Everybody wins! Trading’s not a zero-sum proposition where somebody has to lose for anyone else to win. Could a similar acceptance of duality help unite a divided nation and a divided world? Stock goes to $29 at expiration

Stock stays at $30 at expiration

Stock goes to $31 at expiration

Sold the bullish 27/28 put spread

Gains

Sold the bearish 32/33 call spread

Gains

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TRADER

JENNY ANDREWS

1. Open trading positions 2. Luckbox magazine 3. Tablet showing tastytrade’s Market Measures 4. Cboe trading badge 5. iPhone showing daily futures trading activity

6. Miniature poodle, Clarence

5 6

Average number of trades per day Seven to 10

Hometown Frankfort, Ill.

What percentage of your outcomes do you attribute to luck? I don’t attribute any trades to luck. I’ve been a probability-based trader for almost 10 years now. In my opinion, the probabilities seem to play out. I’ve had as much good luck as I’ve had bad luck, which should happen.

Age 43 Years trading 22 Office When I’m not at tastytrade, it’s a sofa with my laptop and my dog, Clarence. How did you started trading? My grandfather was a fireman at the station across from the Chicago Board Options Exchange (Cboe). He got me an internship at the Cboe when I was 21 … I’ve been trading ever since. Favorite trading strategy for what you trade most Strangles in lower-priced ETFs

Favorite trading moment or best trade and why? My co-host, Liz Dierking and I came up with a new strategy, later named the Jade Lizard. A Jade Lizard is a trading strategy that combines a short put and a short call spread. The strategy is created to have no upside risk, which is done by collecting a total credit greater than the width of the short call spread.

Our first one was about six or seven years ago in Facebook. The trading world liked it, too, and it has become a crowd favorite. I’ll never forget trading the very first Jade Lizard.

FAVORITE BOOK

Worst trading moment or worst trade and why? Getting run over by a large order to buy puts right before the ImClone news was released back in 2001.

OPTION VOLATILITY & PRICING by Sheldon Natenberg Publisher: McGraw-Hill Education (2014) Learn how to trade a Jade Lizard here.

$60.57 (Amazon) Hardcover (592 pages)

PHOTOGRAPH BY GARRETT ROODBERGEN

Co-host of The LIZ & JNY Show on the tastytrade network

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CALENDAR

Underwater drone technology at CES 2019

JA N U A R Y 5 77th Golden Globe Awards Beverly Hills, CA 7–10 CES 2020 Las Vegas

PHOTOGRAPHS: (CES) COURTESY OF CES; (BOOTLEGGERS) WIKIPEDIA; (GRAMMY AWARDS) REUTERS/MIKE BLAKE

CES: The annual gathering of the consumerelectronics industry returns to the Las Vegas Convention Center from Jan. 7-10. More than 175,000 people attended the 2019 show to explore exhibits by 4,500 companies and hear from 1,000 speakers. This year’s topics include 5G, robotics, artificial intelligence and virtual reality.

10 Full Lunar Eclipse

12 Saturn & Pluto conjoin in Capricorn

17 National Bootlegger’s Day

0–25 Wealth365 Summit 2 Online Wealth Conference 26 62nd Annual Grammy Awards Los Angeles

FE B R U A R Y 2 Super Bowl LIV Miami Gardens, FL 4 Gann Day (Change of trend)

A 1925 raid in Elk Lake, Ontario National Bootlegger’s Day: Sharing the date with infamous Chicago gangster Al Capone’s birthday, National Bootlegger’s Day honors the hard work and sacrifice of those who dedicated their lives to running booze. Prohibition, enacted Jan. 17, 1920, was repealed on Dec. 5, 1933. Bootlegging—which got its name because liquor was smuggled in boots—made the booze dry spell a little more tolerable.

St. Vincent performs with Dua Lipa at the 61st Grammy Awards

CAPRICORN CONJUNCTION Jan. 12, 2020, could mark the start of a challenging cycle for the markets (and everything else) as Saturn and Pluto conjoin in the sign of Capricorn. These planets begin a new cycle like this only three to four times a century. Their last conjunction occurred in 1982; the next is in 2053. The last Capricorn conjunction was in 1518. Susan Abbott Gidel is the author of Trading In Sync With Commodities— Introducing Astrology To Your Financial Toolbox.

6 The MoneyShow Orlando* Orlando 16 2020 NBA All-Star Game Chicago 17 Daytona 500 Daytona Beach, FL *For more information visit tastytrade.com (events)

Wealth365 Summit The largest online wealth conference in the world is back with six days of trading, investing and wealth-building education. The free summit, set to feature 90 speakers, includes presentations by tastytrade’s Tom Sosnoff and the Small Exchange’s Donnie Roberts. Attendees can learn from the brightest stars in finance—all from the comfort of their own homes or offices—by registering online at summit.wealth365.com.

january 2020 | luckbox

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CHERRY PICKS

R I PE A N D J U I CY TRADE IDEAS Sign up for free cherry picks and market insights at info.tastytrade. com/cherrypicks

Volatility by Sector By Michael Rechenthin, Ph.D.

raders think of Biotech as the most volatile sector, but it wasn’t in 2019. Last year, the most volatile sector by far was Oil Services, followed by Oil and Gas Exploration and Gold Miners. The least volatile sectors were Consumer Staples, Utilities and Health Care. Why does that matter? Volatility in trading is

synonymous with probability—the more volatile the sector, the higher the probability for movement, and vice versa. So, investors looking for a stable portfolio could pick Utilities and Consumer Staples. For more upside (and also more downside), check out the Oil Services. The important thing is to toss out preconceived ideas of which sectors are more or less

volatile (and choose or avoid them according to a strategy). And go with actual data— that’s what drives Cherry Picks. It speeds up the investment selection process and provides real context for trading decisions. Cherry Picks cover individual stocks, as well as ETFs. And speaking of ETFs, all the sectors mentioned have them.

Keep moving How can traders play these sectors? Check out these exchangetraded funds (ETFs)

LEAST VOLATILE

AVERAGE VOLATILITY

MOST VOLATILE

The more volatile the sector, the greater the probability the stock will move up or down in price, thus creating trade opportunities.

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THE TECHNICIAN

A V E T E RA N T RA D ER TAC K LES T EC HNICALS

Real Expectations for Virtual Reality By Tim Knight

he adoption rate of new technology varies wildly. The iPhone, for example, succeeded almost immediately, and 100 million people now use them in the United States alone. MP3 players, on the other hand, stumbled along with modest sales for years, until Apple came along with the iPod and set the industry alight. An emerging technology that has not yet caught on—at least so far—is virtual reality (VR). Technologists have been talking about virtual reality for decades, and earnest attempts at launching products with mass appeal have been made repeatedly, but nothing’s achieved traction. Indeed, Facebook’s $2 billion acquisition of Oculus probably marked an important peak in the most recent VR craze. Since then, customers have bought only a relatively small number of Oculus headsets and probably haven’t used them much. But a number of public companies are involved in virtual reality. Examining the performance and prospects of their stock, it becomes clear there’s a nearly perfect inverse correlation between a company’s dependence on the VR market and its equity success. In other words, companies that rely on VR have done dreadfully, while those with just a passing acquaintance with VR have done best. Let’s look at some.

Up and back Stock price in Vuzix, which makes wearable augmented-reality devices, soared only to fall back to earth.

Home again Shares in Immersion, a supplier of “touch” virtual reality componentry, fluctuate in price but always seem to return to $7.

IMMR

Vuzix Vuzix (VUZI) is devoted to augmented reality (AR), which blends VR technology with the real world around the user. Products include personal display and wearable computing devices that include smart glasses. It’s an engineering-oriented company that’s come up with some extraordinary innovations, but the most amazing technology in the world isn’t going to make any difference to the bottom line if people aren’t adopting it on a

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broad scale. The company’s stock chart reflects that with a terrific 400% run-up from 2013 until early 2018, only to lose every penny of those gains. Over a six-year period, the stock has, in absolute terms, not budged a penny. Immersion While Vuzix creates components and products directly related to the VR experience, Immersion (IMMR) sells components to large manufacturers. So Immersion doesn’t strive to create new markets or market its products to end users. The company has researched sensory technology that can change the way people interact with devices. The resulting touch feedback technology, or “haptic technology,” can delight consumers, the company says. Consumers have “the power of touch” in gaming consoles, automobiles and smartphones, the company says, noting that its technology is in more than 3 billion devices worldwide. Immersion’s “haptic technology” products create sensory experiences, such as the rumbling vibrations of a race car the user drives. It has had good success with gaming companies, and a huge number of people use Immersion products without knowing it. The company went public in the midst of the Internet bubble of the late 1990s, and its stock peaked at about $80 before crashing to literally pennies. Since then, the company’s stock has been more or less steady at about $7 per share. Over the past 15 years, it had swung in a relatively wide range from about $5 to over three times that much, but on the whole, the price has continued oscillating steadily around the $7 price level. (See “Home again,” left.) Lumentum Much like Immersion, the company called Lumentum (LITE) produces components for other manufacturers. The parts include diode lasers for 3D sensing in smartphone, computing and gaming products. In mobile devices, its diode lasers are used for biometric security that includes face recognition. The lasers enable gamers to control interfaces or play using gestures and body movements. More than 500 million Lumentum diode lasers are operating around the world, the company maintains. So instead of the “haptic” technology of Immersion, Lumentum creates lasers to make the movement and gesture measurements crit-

Poised to break out? If parts-maker Lumentum’s stock price rises, a substantial base could push it even higher.

Nearly recovered After a precipitous decline, Nvidia, a maker of graphics cards, has nearly climbed back to its peak stock price.

ical for a VR experience. The company’s stock progressed steadily higher from 2015 until 2017 and since then has traded mostly between $50 and $60. It has not broken out yet, but if it does, it will have a substantial base behind it, which should power it higher. Nvidia Nvidia (NVDA), one of the most familiar names among VR-related firms, produces

Companies that rely on virtual reality have done dreadfully, while those with just a passing acquaintance with VR have done best. january 2020 | luckbox

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graphics cards heralded as the go-to choice for cryptocurrency miners. Nvidia’s success with crypto has faded somewhat as the entire crypto market took a hard U-turn lower beginning in early 2018. But the company has other markets, including VR. Between 2012 and 2018, the company’s stock never seemed to have a down day, and its move over those six years was a breathtaking 20-fold. In a matter of weeks, however, the company lost over half its value. Q4 2018 was a devastating period for Nvidia shareholders. Since then, it has recovered somewhat, although it is still substantially beneath its nearly $300 price peak. Qualcomm Like most gigantic tech firms, Qualcomm, (QCOM) dabbles in just about any new technology or application that comes into its purview, and VR is no exception. The company says it designs for “fully immersive mobile VR.” Whether or not VR thrives or disappears will, in the short-term, hardly matter to Qualcomm’s bottom line. It is far too small a niche, still in the hobbyist stage, to have an impact. Firms like Qualcomm, however, want to be involved just in case a particular industry takes off, so that it can partake of its success (as it did with cell phones). The stock itself is bullishly poised, with a foundational base spanning nearly two decades (as illustrated by the horizontal line on the chart in “Tentitive commitment,” right). It would seem the company’s long-term prospects remain positive. Axon A firm obliquely related to VR is Axon (AAXN), which years ago was known as Taser. This outfit creates non-lethal guns for law enforcement that use electrical shock as opposed to bullets. Indeed, a web search about Axon and virtual reality will yield sites related to sensitivity training for officers using virtual reality to help them in tense situations. It seems VR has some importance to Axon, however, if the recent board of directors choice indicates its focus. The company tapped Facebook’s chief of virtual reality hardware for the board of directors. The organization’s stock performance has been splendid and, like Qualcomm, the chart seems poised for more strong gains over the long-term.

AAXN

Tentative commitment Qualcomm doesn’t rely on the virtual-reality business, and its stock appears poised for longterm strength.

Obliquely related Axon makes electroshock weapons for law enforcement, which are indirectly related to virtual reality. Its stock price appears likely to remain strong over time.

Whether or not virtual reality thrives or disappears will hardly matter to Qualcomm’s bottom line in the short term.

Tim Knight has been using technical analysis to trade the markets for 30 years. He hosts Trading the Close daily on the tastytrade network and offers free access to his charting platform at slopecharts.com.

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MACRO VIEW

O PPO RT U N I T I ES I N G LO BAL M AR K ET DIR ECT IO NAL T R ENDS

2020 Foresight By Amelia Bourdeau

anuary’s the time to gauge macro themes that will shape trading and investing in the coming year. “Why bother?” some ask. Unforeseen news and updated data will change investor sentiment as the year unfolds, they protest. Nonetheless, traders should look ahead to identify major macro themes and event risks to know what to track to help generate trade ideas and manage current positions. As Buddhist teacher Ethan Nichtern says: “The most important thing is having a clear and healthy framework for dealing with uncertainty, which is what most of life turns out to be.” That’s what trading turns out to be—dealing effectively with market uncertainty. The year begins with an oldie but goodie theme with the potential to raise market volatility. The new Brexit deadline falls on Jan. 31. The U.K. General Election wasn’t over at press time, but the winning party could change the Brexit deadline or influence the withdrawal from the European Union. But based on Brexit-themed trading in 2019, there could be a relief rally for the pound (GBP) versus the dollar (USD) and the pound versus the euro (EUR) when there’s a definite exit date that has an agreed-upon withdrawal plan. However, on the actual exit day and shortly afterward, disruptive events could occur with instituting the withdrawal plans at the U.K. border and with trade—getting food and medical supplies into the country. That could then raise volatility and negatively impact the pound versus the dollar. Q4 earnings for U.S. retailers will be released early in 2020 and watched as a gauge of U.S. consumer sentiment and spending. The holiday shopping season was truncated last year because Thanksgiving fell a week later than usual. The strength of the holiday shopping season could act as a leading indicator for the U.S. consumer ahead for the year. Turning to the U.S. economy, the Federal Reserve signaled at its October monetary policy meeting that it would remain on hold for the foreseeable future, though the policy-

Yen versus dollar The Japanese yen wins versus the U.S. dollar in times of U.S. equity index drawdowns. In other words, the yen strengthens versus the dollar when the SPX falls.

Source: TD Ameritrade

makers thought that risks to U.S. economic activity remained weighted to the downside. One downside risk that the Fed noted in the October meeting minutes was the ongoing U.S.-China trade negotiations. Throughout 2019, U.S.-China trade war headlines, presidential tweets and retaliatory tariffs roiled U.S. equity markets. Negative announcements tended to weigh on U.S. equity indexes on the day and also strengthen the safe-haven Japanese yen (JPY) versus the dollar. This year, investors will have to contend with U.S.-China trade negotiations and the market volatility that will come with it. Investors will also question the strength of the U.S. economy, the extent to which it’s slowing and whether the Fed will cut its policy rate again. Nov. 3 brings the U.S. elections. Financial markets like certainty, so a clear vote outcome on election night would benefit U.S. equities. If the polling is close, that could raise volatility and weigh on investor sentiment. Sectors like tech and health care could suffer if debates or campaigns raise the possibility of stricter regulatory scrutiny. Macro market themes and risks for 2020

tend to have a lot of binary outcomes. That means investor uncertainty and market volatility will rise when event risks come up. Financial markets dislike uncertainty, so safe-haven investments will remain important for the year ahead, and traders should have their preferred safe-haven trades mapped out and ready to go. For U.S. equities, consumer staples and select consumer discretionary stocks are preferred because of their minimal global trade war exposure. The safe-haven currency yen will outperform the dollar, and it’s likely most of its G10 counterparts in times of high market volatility. In foreign exchange, G10 central banks have mostly been cutting their policy rates, so relative value trades based on respective policy rates—the search for yield—will be important. TRADE IDEA Buy a six-month 104.00 USDJPY put. Given the uncertainty ahead in 2020, the yen should strengthen because of its safe-haven status. Amelia Bourdeau is CEO of marketcompassllc.com, an advisory firm that provides global macro education and trading strategy to investors of all levels. @ameliabourdeau

luckbox | january 2020

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Moder

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trades

DO DILIGENCE

QU I E T FOU N DAT I O N HELPS P ROACT IV E INV ESTO RS U NDERSTAND T HEI R PORTFOLI OS

Auto Show: Ford vs. Tata By James Blakeway

n November 2019, Mustang enthusiasts gawked and cringed when Ford (F) unveiled the latest addition to the Mustang lineup: the Mach-E. It wasn’t a louder, faster, 550-horsepower V8 pony car, but rather a silent, all-electric SUV. While this left Mustang purists confused, some outside observers saw it as a logical move for Ford. Most car makers, especially luxury brands, are expanding their SUV offerings. Twelve years ago, BMW offered consumers only two SUVs—the X3 and the X5. Now, that line has expanded to seven X models. Similarly, Mercedes-Benz now offers seven SUVs, with two more on the way. At Tesla (TSLA), which makes only electric vehicles, models have been proliferating. In 2013, the company made just one model, the Model S sedan, and sold under 17,000 cars. Fast-forward to 2019, and Tesla sold 97,000 cars in Q3 alone. While sales grew for the Model S and the newer Model X SUV, the bulk of sales, 79,600, were of their latest economical sedan, the Model 3. The Model 3, a cheaper and smaller alternative to Tesla’s pricier vehicles, has been a hit with consumers, selling 403,000 units since its launch in 2017. In 2020, Tesla is scheduled to start selling the Model Y, a smaller, cheaper SUV. The Model Y will compete directly with the electric Mustang SUV. Shifting to the financial outlook of the top automotive players, Ford has struggled to maintain consistent net income for shareholders. While the stock recovered from the 2008 financial crisis, it saw steady declines from 2014 to present. Despite Tesla’s growing popularity, the company has yet to generate an annual positive earnings per share. While the stock saw a rally in 2013 and again in 2017, it’s been a nail-biting, long-term investment with

Divergence Ford gained value, while Tesla and Tata sank last year. Meanwhile, their competitors generally made gains.

excessive volatility. Active traders rejoiced in the two-sided action, making TSLA a compelling trading vehicle for those who can stomach the swings. But what about the rest of the automotive sector? In a year with aggressive growth in the U.S. stock market, with the S&P 500 up over 25%, the automotive industry saw mixed returns. Consider the table and graph, which reflect the performance of publicly traded automotive companies, both U.S. and international. During the observed period, all seven manufacturers fell short of the S&P 500’s growth. Tata Motors, the parent company for JaguarLand Rover, slumped in Q3 but recovered most of its losses. Tesla’s stock struggled for most of 2019, finally catching a break thanks to a positive quarterly net income and strong

sales numbers reported at the end of October. This recovery was negated after the unveiling of Tesla’s new model, a polygonal, Blade Runner-inspired pickup truck. An equally weighted portfolio of these seven automotive stocks purchased at the beginning of 2019 would have returned 10.8%, compared to the S&P’s 26.2%. A portfolio of the stocks, weighted by market cap, would have returned a slightly higher 15.7%, thanks to Toyota’s larger allocation in the weighted portfolio. Overall, the auto manufacturing sector is lagging behind the broad market. Further insight was obtained by running the equally weighted portfolio through Quiet Foundation’s free portfolio analysis software. The analysis revealed the portfolio’s overall correlation to the S&P 500 was 0.45, a fairly

TSLA

Past performance is no guarantee of future results. Information provided in an EPI Report does not consider the specific profile, objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her investment professional. Investment suitability must be independently determined for each individual investor. QF does not make suitability determinations or investment recommendations for investors. EPI utilizes the S&P 500 as its benchmark given that the S&P 500 is considered a barometer of stock performance in the United States. Aspects of the analysis and information found in an EPI Report are based upon simulated and/or hypothetical performance. Simulated and hypothetical performance have inherent limitations and do not represent the actual performance results of any particular investment products. The EPI Report does not guarantee any results or outcomes in the financial markets. Investors should be aware of the methodology used to produce an EPI Report and the inherent limitations when placing reliance on the results. For additional information about EPI Reports, visit the QF website: quietfoundation.com.

luckbox | january 2020

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trades

Auto Correlation Prominent Brands

Price

Market Cap ($B)

Dividend Yield

2019 Returns

Correlation to S&P 500

Ford, Lincoln, Mustang

$8.89

35.2

6.89%

23.92%

0.5

Fiat Chrysler Automobiles

Fiat, Chrysler, Dodge, Alfa Romeo, Maserati, Jeep, Ram

$14.8

29.34

4.65%

18.71%

0.5

General Motors Co

Buick, Cadillac, Chevrolet, GMC, Corvette

$35.32

50.5

4.38%

8.86%

0.6

HMC

Honda Motor Co

Acura, Honda, Honda Motorcycles

$28.53

50.5

3.61%

10.01%

0.6

Toyota Motor Corp

Toyota, Lexus

$142.55

202.4

N/A

22.80%

0.5

TSLA

Tesla Inc

Tesla

$333.04

60.2

N/A

0.07%

0.2

TTM

Tata Motors Ltd

Jaguar, Land Rover, Tata

$11.17

10.9

N/A

-8.29%

0.1

SPY

S&P 500 ETF (Benchmark)

N/A

$311.02

N/A

1.81%

26.18%

1.0

Symbol

Company

Ford Motor Co

FCAU

Data as of Nov. 22, 2019

low correlation. The least correlated were Tesla (0.2) and Tata Motors (TTM) (0.1). Given the lower correlations to the overall market, auto stocks could make a compelling addition to a diverse portfolio. While uncertainty surrounding global trade wars and warnings of a potential economic slowdown could make investors skittish about buying into an already lagging industry, it may be worthwhile for investors to monitor the auto industry in the event of a downturn. If the S&P 500 starts to fall, stocks like Apple (APPL), Microsoft (MSFT) and Facebook (FB), that make up large percentages of the index, could fall to rational prices. These stocks would likely drag down the rest of the market with them, meaning auto stocks could become undervalued by the market, creating a potential buying opportunity. In the crisis of 2008, “The Big Three” U.S. automakers (Ford, Chrysler and GM) were bailed out by the U.S. government and ultimately survived, recovering in the last decade. While these companies are hopefully more recession-proof than 10 years ago, the govern-

2001-trades-dodiligence.indd 57

ment may be less willing to step in a second time around. As a result, investors tempted to dive into these stocks may look to diversify across multiple auto companies. Unfortunately, the sector is not well covered by the exchange-traded fund (ETF) industry. The First Trust NASDAQ Global Auto Index Fund (CARZ, $33.74) is one possible investment choice for adding automotive stocks. However, the fund is fairly illiquid, with very few shares traded—an average of 3,350 per day last year. That could make it harder for investors to exit positions when capturing profits or mitigating losses. Investors could instead consider creating their own diversification, using multiple stocks across the industry. Opportunity may or may not present itself in the auto manufacturers, but it is a sector worth watching. As always, investors should stay nimble and remain patient but, most important, do their due diligence.

TTM

James Blakeway serves as CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment analysis services for selfdirected investors.

Given their lower correlations to the overall market, auto stocks could make a compelling addition to a diverse portfolio.

Evaluate any portfolio with Quiet Foundation

january 2020 | luckbox

12/20/19 12:47 PM

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tactics

SPECIAL SECTION Luckbox is devoting this month’s tactics section to a three-part series on protective puts, courtesy of the Learn Center @tastytrade

essential trading strategies

BASIC

A Better Way to Put It Protective puts are popular, but traders have more cost-efficient ways of hedging their positions By Michael Rechenthin

osses hurt. Experiments indicate that avoiding a $5 loss carries twice as much psychological power as experiencing a $5 gain. Traders who overstress about loss avoidance actually create the loss they so much want to avoid. A simple online search for “protecting a portfolio from loss” yields an overwhelmingly large number of recommendations to “buy puts.” A put protects the position against a loss in the account. It’s like an insurance policy to protect against loss. But the strategy doesn’t work long-term. The more fear, the higher the cost of the “insurance.” With a moderate VIX (volatility index) fear level of 20, investors pay roughly 6.6% annually for a 5% drop insurance. Considering the average return in the S&P 500 is 6% during the past 20 years, that means the investor is paying more for insurance than the market returns on a given year. Thus, an investor trying to minimize a drop in the account locks in a loss by buying the put. And by creating an initial cost through the price of the put, the break-even becomes even higher for the account holder. Instead of creating a higher threshold for profitability, an investor can lower the breakeven point by selling calls against the position held. By managing positions and managing the gains around those positions, an investor can make break-even lower still. (For more on this technique, see “Advanced Tactics,” p. 61.)

Paying protection money

Michael Rechenthin, Ph.D., aka “Dr. Data,” is the head of data science at tastytrade. @mrechenthin

2700

As fear of a loss increases, the cost of an “insurance policy” against risk goes up, too. Fear in the market

30 days of protection for $1,000 worth of stock against a 5% drop

Percentage of the portfolio sacrificed for the 5% drop peace-of-mind

Low (15 VIX)

$2.29

2.8%

Moderate (20 VIX)

$5.52

6.6%

High (25 VIX)

$9.52

11.4%

Crossing the threshold Buying put protection creates an immediate loss and raises the break-even threshold. Instead, focus on probabilities and strategies that lower the break-even point.

3100

3000

2900

2800

April 2019

June 2019

Aug. 2019

Oct. 2019

Dec. 2019

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tactics

INTERMEDIATE

The Myth of the Protective Put Buying an expensive “portfolio insurance policy” hardly ever works By Michael Gough

Trying to maintain a hedge with long put options is expensive and requires nearly perfect timing. 60

traded fund. Trying to maintain a hedge with long put options quickly becomes futile as the high cost diminishes their potential benefit. Secondly, if the investor buys the put, it requires near-perfect timing for the hedge to be profitable. If, in the previous example, the market didn’t correct—poof, there goes $3 in option premium. Or, even more demoralizing, the market falls to 2,000 on the 46th day. Maintaining the hedge requires consistent put buying, and that cost can quickly add up, especially during a bull market rally like that of 2009 to present. Maintaining a consistent hedge with long put options has historically been an ineffective strategy. The table, right, presents statistics on the value of buying puts. From 2005 to the present, buying 45-day portfolio insurance with long put options in SPY has resulted in an average trade performance of -$19.00. Given the option’s delta and its probability of expiring in the money by expiration, these options should have been profitable around 5% of the time. In reality, they were profitable only 2% of the time. During this back-test period, the largest profitable long put option netted a gain of $1,788. Depending upon the timing, that may be enough to convert the cost of buying puts but would probably not cover the losses incurred in a long stock portfolio. Long put options can provide portfolio peace of mind, but they aren’t an effective tool for maintaining a consistent hedge because of their high cost and reliance on perfect timing. More effective strategies, such as portfolio diversifica-

Put off buying protective puts History shows that maintaining a consistent hedge with long put options just hasn’t been an effective strategy.

5 Delta Put Options Held to Expiration

Average P&L -$19 Expected Win Rate 5% Actual Win Rate 2% Maximum Profit $1,788

tion and delta hedging, can provide similar portfolio protection without the high cost. Michael Gough enjoys retail trading, and writing code. He works in business and product development at the Small Exchange, building index-based futures and professional partnerships.

Learn more about the cost of protective puts

PHOTOGRPAH: SHUTTERSTOCK

n Chicago, the weather can seem as volatile as the market. A day that begins with a 5% chance of rain can end with a torrential downpour. In a similar way, buying put options to protect a portfolio against a downturn seems a lot like grabbing the umbrella before heading out the door to work. The cost is low and the benefits can be huge. Put options can protect a portfolio during a downturn by locking in a selling price before the market crashes. Assume the market is trading at 3,000 and an investor thinks it could fall 10% in the next 45 days. To protect a portfolio, an investor buys the 2,700 put option for $3. Several days later, the market crashes to 2,000. With the 2,700 put option, the investor can immediately sell the portfolio for 2,700, which is a much better price than the current 2,000. Buying the put has protected the investor’s portfolio against the extreme down move. But this investment narrative is missing details. Firstly, market participants are already pricing in the possibility of a large down move in the market. This risk is manifested in the price of put options. On average, put options trade almost twice as rich as the same delta call options on SPY, the S&P 500 exchange-

luckbox | january 2020

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tactics

ADVANCED

False Prophets Get It Wrong About Profits New data suggests it pays to concentrate on managing stocks that are gaining value, not the ones in decline By Anton Kulikov

ILLUSTRATION: SHUTTERSTOCK

or the last 100 years, Wall Street has been dispensing this advice to investors: “Cut your losses and let your winners run.” The adage formed the basis of trading discipline. The problem is that it’s not necessarily true. To build wealth, in fact, the opposite may be a better strategic choice. The data backs that up—thanks to research tools that weren’t available even 10 years ago. So, don’t fault the old-timers for getting it wrong. It’s just that today, investors should base decisions on the latest information. After all, it feels awful when a loss wipes out weeks, months or even years of gains. But the reason that happens has less to do with a lack of discipline and more to do with strategy. Luckily, in today’s world of largely democratized financial technology, individual investors can take advantage of strategies that enhance portfolio performance. Pundits often dwell on ways to stop losses, but it’s more advantageous to enhance performance by managing existing winners. Why? Because the probabilities and historical backtests suggest that managing winners will more effectively boost overall portfolio returns and prevent profitable positions from slipping away and turning into losses. The philosophy of managing winners instead of losses stems from the fact that losses, albeit undesirable, cannot be

Good management prevails Trades in the right-hand column fared best because proper oversight prevented winners from careening into the losing column. SPY Strangles 45 Days to Expiration

No Management

Managing Losses at 2x of Credit Received

Managing Winners at 50% of Credit Received

Average Daily P/L

$1.50

$1.46

$1.70

Win Percentage

83%

80%

91%

controlled. Managing losers will only lock in the loss and does nothing to prevent future losses. In other words, managing losers is a reactive strategy, and managing winners is a proactive strategy. Investors should remain proactive and thus give themselves the best chance of success while they can still control the outcome of a win. So, what do the numbers say? The table above shows a historical backtest of a strategy known as a short strangle in the S&P 500 ETF (SPY) going back 14 years. In the left column, the trade was placed 45 days to expiration and then held to expiration. In the middle column, the trade was placed 45 days to expiration and then taken off if and only if the loss reached two times the credit received for the strangle; otherwise, it was held to expiration. In the right column, the trade was placed 45 days

to expiration and then taken off if and only if the trade reached a profit of 50% of the credit received; otherwise, it was held to expiration. The rightmost column yielded the best results, not only in terms of daily profits, but also in terms of risk and win percentage. The reason? Managing winners prevents those winners from turning into losses, while losses that already have happened did not get much worse. That means overall performance was improved, and the numbers demonstrate that. The moral of the story is that taking a loss is largely unproductive compared to managing existing winners. To enhance a portfolio’s returns, increase the win percentage and reduce the risk, compared to managing losses. Anton Kulikov is a trader, data scientist and research analyst at tastytrade. @antonkulikov97

It feels awful when a stock market loss wipes out weeks, months or even years of gains. january 2020 | luckbox

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ions”

ommiss C ro e Z “ t u o b A th The Tru ders and investors

An open letter to tra

T are most certainly NO d options on futures an ing giv as, ide are s of t firm s. The major you’re fresh ou zero at those big firm What do you do when it. ed ne rry n’t wo u do yo d we just where le to sleep an us zero commissions, your story puts peop u g Yo din rs? tra me t sto jus l, cu ita ur the cap s than yo But even if you have more about your bonu slap some lipstick ct, du ve zero commissions ha pro y e’s the els se e cau on stocks be copy some ew “N , ing cry or se three short do the t it ou make sense. Selling tho ’t esn do on that pig and push le litt ur to expiration gives might be proud of yo ple puts with 45 days Ap 5 24 and Improved!” You as it see , and there is an us just shrug and about $1,200 in credit u yo gambit, but the rest of t ou g yin g half that—$600— . That’s what’s pla % probability of makin 82 a version of fake news the ere wh ch option has $0.65 of kerage world, before expiration. If ea now in the online bro , cts du pro g kin commission to close groundbrea commission (and zero majors aren’t giving us ’re ey Th nt. nte co orks), that total $1.95 or useful it if you trade at tastyw sweet new technology lly. rea t no ly On 00 of potential highions. commission versus $6 giving us free commiss d too high. Selfity profit doesn’t soun bil ba pro Hence, fake news. ology that gives them in proper herd-like ted traders need techn ec A couple months ago, dir w ty eli Fid d with the content to sho Schwab, ETrade an se metrics, combined tho fashion, big firms like to s big ion a iss A $0.65 comm issions. It made them how to apply it. announced zero comm But commission a all, er Aft an honest trade to us. . dia like me ms l deliver that see splash in financia ly on e is y’r on the cti en nsa wh issions y and sell tra trumpeting zero comm attached to every bu 10 is ce sin gy y olo ne hn mo tec de when the have ma for stock trades, and the way stock brokers and at for self-directed gre is —that’s just dishonest t me tha ga g tin the na d mi hin be ars ye forever. Eli But look closely. The unethical. investors and traders. t because you don’t ly for online stock and on o zer are s ion ke news isn’t fake jus iss Fa comm of st e. It’s mo es it’s completely untru d trades, which do like it or even because exchange-traded fun s for ion iss mm generates. Co about the emotion it us zero good. y use bu ca lly be e ua fak act le it’s zero. But many peop Here’s the deal. Not stock trades really are g ttin ge the e se y’r cau the be nk , basically avvy investors thi s-s les s ke ma it and sell stocks anymore s ha over the past 10 years y’re not. The broker is a great deal when the relentless rally in stocks lita cap m the ke ma high-profit advisory to high them in to sell them ing lur made their prices too , cks sto ds, charge them e of the most popular cts and proprietary fun du pro efficient. Apple is on a y bu more of their assets it takes $26,000 to count fees, and place ac but at $260 per share g lin wil e u’r impress Wall Street , and even if yo der management to un round lot of 100 shares ed ne l t stinks. margin, you stil analysts. We think tha to pay interest to use most of us to for ers it, you’re not the mb for nu g big yin pa are t If you’re no $13,000. Those idea product. That’s an old customer—you’re the trade one stock. ns tio s op ker d bro an s big ure ese fut re. Th tions, that comes into play he So, people trade op , just as liquid as stocks they’re not charging en se oft cau be are ke ey Th bro s. go won’t on future e Th nt. cie effi ey’re cooking up new alpit it. ca re issions. Far from Th mm co but they’re much mo ms an , m their customers. It see rt 245 puts in Apple ys to extract wealth fro wa margin on three sho to s as lta ide de e w ne es cooking up de to get the sam that we’re the only on alternative bullish tra t. ly about on es uir Hey, we’re OK with tha req h. ck, alt sto we help you build as 100 shares of the of % 45 n at’s less tha $11,500 in capital. Th gies Other options strate ck. sto for t Sincerely, requiremen require even less. s, less than 2% of That’s why at tastywork savvy Bu s. t tastyworks has trades are stock trade r the Fo t everybody else? customers. What abou , selfive act Tom Sosnoff less than 50% of Tom Preston major online brokers, re mo s an me co-CEO at t de stocks. Th Quantitative Strategis directed investors tra ns tio op d an tastytrade s ure options, fut tastytrade than 50% are trading s ure fut ns, tio op for issions on futures. And comm

luckbox | january 2020

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tactics

CHEAT SHEET

Trade Management Prepare for almost anything by outlining and organizing a trading response for every for every short option position

nvestors should formulate a contingency plan as soon as they place a trade. In the example of trade management below, the flowchart lays out actions to take for several possible scenarios. Improving mechanics this way is a key to successful trading, and a tool like this can help. Mike Hart, a former floor trader at the Chicago Stock Exchange and proprietary futures trader, specializes in energy markets and interest rates @mikehart79. Anton Kulikov is a trader and data scientist @antonkulikov. Both are research analysts at tastytrade.

By Anton Kulikov & Mike Hart

SHORT PREMIUM POSITIONS START HERE

Defined Risk Position

Position has more than 21 days to expiration

Leave alone until 21 days to expiration

Undefined Risk Position

Position has less than 21 days to expiration

IV Rank is low (under 30)

Position profitable or at scratch

Close position

Position has more than 21 days to expiration

IV Rank is high (over 30)

Position has less than 21 days to expiration

Undefined risk side has been breached

No side has been breached

IV Rank is low (under 30)

IV Rank is high (over 30)

Roll untested side closer to the money in same cycle

Leave alone until 21 days to expiration

Close entire position regardless of P/L

Close and reestablish position in next expiration cycle

Position at a loss

Hold until scratch or expiration

Close and reestablish position in next expiration cycle

january 2020 | luckbox

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luckbox of the month

OK BOOMER

nstead of choosing an individual for Luckbox of the Month, the magazine is recognizing the blind luck of an entire generation— the baby boomers. The cohort born between 1946 and 1964 has tended to fare well in the markets, often by passively holding onto stock and relying on dumb luck. There’s also no denying boomers have had the good luck to live in interesting times. They grew up in the optimistic ‘50s and came of age during the sexual revolution of the ‘60s. They fought or resisted an unpopular war, witnessed the space race, navigated the heyday of recreational drugs and tore down the Berlin Wall—all while their passive investments grew exponentially. Boomers have been the luckiest generation since their grandparents hit it big in the markets in the Roaring ‘20s—before giving it all back in 1929. The oldest members of the baby boom probably began investing in the early ‘70s at the age of 25. Based

on returns for the S&P 500, anyone investing throughout the period from 1971 to now would have seen her stash of greenbacks grow eight times larger. Of course, the ride wasn’t always smooth. Boomers saw annualized returns of more than 12% from 1971 to 1990 but also suffered through years like 1974 when the market fell almost 27%. Periods of high inflation took a bite out of returns, too. But the boomers still lucked out. Gen X, born between 1965 and 1980, began investing in the ‘90s, just in time for the recession of 1991-92. Millennials, who came into the world from 1981 to 1996, began investing in 2006, not long before the Great Recession threatened to take down the entire economic system. Members of Gen Z, born in 1997 or later, have been late to the party and are just now beginning to invest. And here’s a piece of advice: Younger generations shouldn’t rely on passive investing to pay off the way it did for their luckbox parents.

Boomers’ explosion Here’s the relative performance of a dollar invested in the first year of each generation and tracked throug the generation’s final birth year. 5 Baby Boomers 1944-1964 Gen X 1965-1979 4

Millennials 1980-1993 Gen Z 1994-2015

Take our reader survey. We may publish your comments!

ILLUSTRATION BY LUCKBOX STAFF

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Jan-Feb 2020

Articles inside

Catfish Are Biting in Love and in Money

The Real Threat of Deepfake

trends

The Greatest Tennis Player of All Time

The Myth of the Protective Put

False Prophets Get It Wrong About Profits

Real Expectations for Virtual Reality

Bluffing Is Real

The Greatest Tennis Player of All Time

Wrestling with Reality

Real Possibilities in Spatial Computing

Getting Real About The RealReal

The State of Deepfakes: Landscape, Threats and Impact

The Real Threat of Deepfake

Truth Be Told: News Is Biased (Odds Are … You Are, Too)

Fakery and the Authentication Economy

Catfish Are Biting in Love and in Money

Truth Be Told: News Is Biased (Odds Are … You Are, Too)

2020 Foresight

January 2020 (i)