David Rosenthal: uncertainty

Transcript context

…This really does illustrate where do they make their money from? Who is on the other side of these trades? It’s people acting emotionally. They have effectively these really robust models that are highly unemotional, that are making these super intricate multi security bets. They’re putting on exactly the right set of trades to achieve the risk and exposure that the system wants them to have. Who is on the other side of those trades? It’s panic sellers, it’s dentists, it’s hedge funds who don’t trust their computer systems and are like, ah, crap, we got to just take risk off even though it’s a negative expected value move for us. They’re basically trading against human nature. Importantly, in this business versus every other business that we cover here on Acquired or most other businesses, this is truly zero sum. It’s not like they’re here in an industry that’s a growth industry and lots of competitors can take different approaches, but the whole pie is growing so much that I don’t care if no, you’re fighting over a fixed pie here. I’m trading against someone else. I win. They lose. There’s one slight nuance to that, but I don’t know how much it holds water. The apologist nuance would be, well, Warren Buffett could be on the other side of the trade, and Medallion could make money on that trade with Warren over its time horizon of a day-and-a-half. Warren could make money over his time horizon of 50 years. Super fair.…

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