Don't chase the fads.
The most shocking thing about the collapse of Theranos is that people are shocked. Well, I suppose that isn't fair. The story is shocking, without a doubt. As detailed in John Carreyrou's new book, "Bad Blood: Secrets and Lies in a Silicon Valley Startup," Elizabeth Holmes lied constantly about every aspect of her business, its products and anything else - reaching a valuation upwards of $9 billion before reality came crashing down around her.
But the primary deception around the efficacy of Theranos' supposed breakthrough compact blood-testing technologies really shouldn't be that shocking at all. Because what has become very clear about the star-studded list of venture capitalist backers, board members, fawning journalists and investors is that none of them understood the technology or bothered to evaluate it for themselves.
This isn't the first time we have seen brilliant investors left naked and exposed over a shameful lack of due diligence. The documentary film "The China Hustle" has exposed accounting irregularities and what appears to be rampant fraud amid the Chinese reverse-merger boon. Again, investors were exposed after assuming due diligence had been conducted by institutions that, as it turned out, had done no such thing.
What really sticks out to me is that all of these investments betray the irresistible allure of what might be hidden behind the curtain. Complexity sells. As an ETF issuer, over the past year we have been approached by a dozen "AI machine-learning" creators looking to license their algorithms into an ETF that we would sell. In most of those presentations, when we pressed with even the simplest questions about where the "algo" sources its position signals from or how the mechanics of the security selection work, the responses have illuminated nothing but buzzwords and catchphrases.
We might be passing on the next big thing, and I recognize that is a possibility. Or we could be passing on yet another fad in an industry that has earned a terrible reputation from selling overly complex financial solutions that end up ruining investment accounts and lives. I wouldn't know which because I'm not qualified to evaluate artificial intelligence. And anyway, I prefer simplicity.
Here is a simple concept: Customers are entirely responsible for putting revenue into a company, and satisfied customers increase the likelihood of continued or growing revenue.
Here is another: Smaller companies tend to outperform larger ones, albeit with higher volatility, over long timeframes, so index funds should tilt to the smaller rather than the larger companies in the index.
Simple ideas stand the test of time. The straightforward insight and morality written in the Bible continues to comfort countless people today, 3,300 years after it was written. The basic wisdom of Confucius has survived 2,500 years and counting. Stoicism is making a powerful comeback 2,000 years after Seneca first made an impact. Simplicity cuts through and lasts forever.
On our upcoming Exponential ETFs Exceptional Podcast, we had a great time talking with Matt Hougan about a variety of topics. Matt is a brilliant ETF industry aficionado turned crypto index fund entrepreneur. One of my favorite Matt Hougan quotes is how he described the ETF as a potato peeler - simple, useful, and built to last.
Without the expertise and access to data required to do deep due diligence on company technologies, complex investment fund strategies or opaque financials of questionable companies, investors are better off using strategies that are clear, simple, transparent and built to last. Potato-peeler strategies, if you will.
By: Phil Bak, CEO of Exponential ETFs