By Steve Tepper, CFP®, MBA
One of my favorite TV shows the last few years is the HBO comedy Silicon Valley, featuring a hapless team of techno-geeks who could all become overnight billionaires if not for their own foibles and follies.
A scene from season one of the show has stuck with me for years. A group of startup executives are meeting with venture capitalist Peter Gregory (wonderfully played by the late Christopher Even Welch) to discuss another round of funding. They’ve got a couple of days left before they’re broke. Gregory is only interested in talking about hamburger buns. “Have any of you ever eaten at Burger King?” Throughout the episode, the company execs become more and more desperate for money, even as Gregory becomes more and more obsessed with the count of sesame seeds on the buns of each type of hamburger on the menu.
With massive layoffs just a few hours away the execs demand an answer, “Are we getting the money or not?” Gregory announces that world sesame seed production is about to plummet as rare sesame loving cicadas bloom in two of the three countries that produce sesame seeds, and he has made a large purchase of sesame seed futures in Indonesia, the only country that will not be affected by the insects.
Just a 10% increase in the futures, he says, will net him $68 million, so he writes a big fat check, high fives are exchanged, and everyone enjoys a delicious Burger King breakfast.
It’s a very funny scene, but ludicrous from a financial planning perspective in many ways, perhaps none greater than the idea of people enjoying Burger King for breakfast (wrote the resident food snob). While very entertaining, I’m going to play the spoil sport and point out the many real-world problems with the investment aspects of the scene:
- Nobody else in the world figured out what Gregory did, that cicadas were going to hatch in two countries, or the implication that those cicadas would destroy a lot of crops. I grant you there may not be a lot of analysts covering insect populations in Myanmar, but the other country was Brazil. It seems like it would be on someone’s radar that massive crop destruction was imminent in the fifth largest country on Earth.
- Some time after his purchase, futures traders also figured out the cicada problem and poured their money into Indonesian futures like he did, sending the price up.
- He was so confident in his future earnings, he wrote an 8-figure check before seeing a penny of profits from the trade.
- Nothing else happened over the next year to jeopardize Indonesia’s future stranglehold on sesame seed production, like, for example, some other country without a cicada problem getting into the sesame business or the Brazilians buying a bunch of bug zappers.
This exchange illustrates the inherent problem with stock picking. It only works if (1) you figure out something no one else has figured out, including thousands of market analysts whose job it is to figure things out, (2) you make an investment based on what you figured out, (3) the rest of the world then figures it out and asset prices move accordingly, and (4) nothing else happens in between event 2 and 3 that moves the price in a different direction.
That’s a lot to count on, so my advice is this: If that’s how you plan to invest your money, don’t write any checks just yet