Highly boring, highly complex. The best place to find investments.
From Michael Lewis’s classic, Liar’s Poker, some thoughts on how the bond market worked:
A new employee, once he reached the trading floor, was handed a pair of telephones. He went on-line almost immediately. If he could make millions of dollars come out of those phones, he became that most revered of all species; a Big Swinging Dick. After the sale of a big block of bonds and the deposit of a few hundred thousand dollars into the Salomon till a managing director called whoever was responsible to confirm his identity. "Hey, you Big Swinging Dick, way to be."
Many great investments are found at the nexus of businesses that are highly boring and highly complex—a disproportionate number of great investments in-fact. Everything in the universe is a supply and demand curve. Because there is an insufficient supply of entrepreneurs focused on the highly boring but highly complex, the investment returns are elevated.
Compare the three alternates: 'boring and simple'; 'complex and simple'. It is just too hard to get differentiation without enough complexity. This lends itself to commoditisation.
'Interesting and complex': this attracts the most brilliant and gifted entrepreneurs; as well as fierce competition. Space tech, electric vehicles, self-driving and artificial intelligence, are good examples in this area of innovation. Brimming with brilliant, passionate geniuses who love their work and seek both financial and spiritual return on their efforts.
Now consider 'boring and complex'. Seldom boasted about at dinner parties are the trials and tribulations of audit software startups and regulation technology disruptors. People want to sit next to the SpaceX employees and the social media founders. Because there are fewer entrepreneurs in the boring and complex space, the chance of having entrepreneurs succeeded is significantly higher.
A case in point: the opening Michael Lewis excerpt captures the way bond trading used to work—it was done by phone. That’s the way bond trading worked through most of the 1980s and 1990s. Even when other asset classes like foreign exchange and equities migrated away from telephones and onto computers, bonds resisted. Highly complex. Highly boring.
Bond traders resisted because bonds are more complex and much less standardised when compared to some other asset classes. There is only one Google stock, for example, but there are plenty of Google bonds. All different.
For every common stock in the S&P 500, there are over 20 outstanding corporate bonds. Look beyond the S&P 500 and the number of bonds mushrooms - each with a different interest rate, a different maturity, and different terms. Without standardisation, assets are hard to trade on an exchange. When an investor wants to buy a bond, they ring round bond salespeople at broker-dealers and enquire about price and availability. Not exactly time or market efficient.
An outstanding investment opportunity.
Rick McVey, having bored a sufficient number of people at dinner parties with the idea of a web-based, multi-dealer trading platform for credit, pitched to JPMorgan’s in-house incubator; and MarketAxess was born.
Some smart FinTech businesses find B2B customers as seed investors - it can be an excellent incentive to get them to transact - Bloomberg did it with Merrill Lynch. ICE did it with Goldman Sachs and Morgan Stanley. MarketAxess did it with JPMorgan and Bear Stearns, who kicked off the business with $24 million. MarketAxess received commission from the broker-dealer for facilitating the trade: in its first full year of business, MarketAxess facilitated $11.7 billion of trading volume (which sounds impressive; now it will often do that in a day).
Today MarketAxess has a market cap. of $20bn.
Look for people solving highly complex, highly boring problems.
