Lex Fridman PodcastRichard Craib: WallStreetBets, Numerai, and the Future of Stock Trading | Lex Fridman Podcast #159
EVERY SPOKEN WORD
150 min read · 30,022 words- 0:00 – 2:28
Introduction
- LFLex Fridman
The following is a conversation with Richard Craib, founder of Numerai, which is a crowdsourced hedge fund, very much in the spirit of WallStreetBets, but where the trading is done not directly by humans, but by artificial intelligence systems submitted by those humans. It's a fascinating and extremely difficult machine learning competition, where the incentives of everybody is aligned. The code is kept and owned by the people who develop it. The data, anonymized data, is very well organized and made freely available. I think this kind of idea has a chance to change the nature of stock trading and even just money management in general by empowering people who are interested in trading stocks with the modern and quickly advancing tools of machine learning. Quick mention of our sponsors. Audible Audiobooks, Chara-Labs machine learning company, Blinkist app that summarizes books, and Athletic Greens all-in-one nutrition drink. Click the sponsor links to get a discount and to support this podcast. As a side note, let me say that this whole set of events around GameStop and WallStreetBets has been, uh, really inspiring to me as a demonstration that a distributed system, a large number of regular people are able to coordinate and collaborate in taking on the elite centralized power structures, especially when those elites are misbehaving. I believe that power, in as many cases as possible, should be distributed, and in this case, the internet, as it is for many cases, is the fundamental enabler of that power, and at the core, what the internet and its distributed nature represents is freedom. Of course, the thing about freedom is it enables chaos or progress or sometimes both, and that's kind of the point of the thing. Freedom is empowering but ultimately unpredictable, and I think in the end, freedom wins. If you enjoy this podcast, uh, subscribe on YouTube, review it on Apple Podcasts, follow on Spotify, support our Patreon, or connect with me on Twitter @lexfridman. And now, here's my conversation with Richard Craib.
- 2:28 – 16:41
WallStreetBets and GameStop saga
- LFLex Fridman
From your perspective, can you summarize the important events around this amazing saga that we've been living through of WallStreetBets, the subreddit, and GameStop? And in general, just what are your thoughts about it from a technical to the philosophical level?
- RCRichard Craib
I think it's amazing. It's like my favorite story ever. Uh- (laughs)
- LFLex Fridman
(laughs)
- RCRichard Craib
Like, when I was reading about it, I was like, "This is the best." Um, and it's- it's also, you know, connected with my company, which we can talk about, but what I liked about it is, like, I like decentralized coordination, and looking at the mechanisms that these r/WallStreetBets users use to hype each other up, to get excited, to prove that- that they bought the stock and they're holding. Um, and- and then also to see that how big of an impact did that decentralized coordination had. Um, it really was a big deal.
- LFLex Fridman
Were you impressed by the distributed, uh, coordination, the collaboration amongst, like, I don't know what the numbers are. I know Numerai's looking at the data. After all of this is over and done, it'd be interesting to see, like, from a- a large-scale distributive system perspective to see how everything played out, but just from your current perspective, what we know, is it obvious to you that such incredible level of coordination could happen, where a lot of people come together in a distributed sense, there's an emergent behavior that happens after that?
- RCRichard Craib
No, it's not at all, um, obvious, and one of the reasons is the lack of kind of, like, credibility. To coordinate with someone, you need to kind of make credible contracts or credible c- claims. So if you have, um, a username on, uh, r/WallStreetBets, like some of them are, like DeepFuckingValley is one of them-
- LFLex Fridman
That's an actual username, by the way. We're talking about there's a website called Reddit (laughs) and there's subreddits on it, and, uh, a lot of people, mostly anonymous, I- I think, for the most part, anonymous, uh, can create user accounts and then can then just talk on forum-like style boards. You should know what Reddit is. If you don't know what Reddit is, check it out. Uh, if you don't know what Reddit is, maybe go to, uh, the, uh, aw sub- subreddit first, A-W-W, with cute pictures of cats and dogs. That's my recommendation. Anyway.
- RCRichard Craib
Okay. Yeah, that would be a good start to Reddit. When you l- when you get into it more, go to r/WallStreetBets.
- LFLex Fridman
(laughs) It gets dark quickly.
- RCRichard Craib
(laughs)
- LFLex Fridman
We'll- we'll probably talk about that too. Uh, so- so yeah, so- so there's these users and it's- there's no contracts, like you were saying.
- RCRichard Craib
There's no contracts. The- the- the users are anonymous, um, but there are little things that- that do help. So for example, if you've posted a really good investment idea in the past, that exists on Reddit as well, and it might have lots of upvotes, um, and that's also kind of like giving credibility to your next- to your next thing. Um, and then they're also putting up screenshots, uh, like, "This- this is the- these are- I- I- I- here's the trades I've made and here's a screenshot." Now, you could fake the screenshot, but, um, but- but still, it seems like if you've got a lot of karma and you've had a good p- performance on the- on the community, it somehow becomes credible enough for other people to be like, "You know what? He actually probably did put a million dollars into this, and you know what? I can- I can follow that trade easily."
- LFLex Fridman
And there's a bunch of people like that, so you're kind of, uh, integrating all that information together yourself to see, like, "Huh, there's something happening here," and then you jump in- onto this little boat of, like, behavior, like, "We should buy this stock or sell this stock," and then another person jumps on, another j- person jumps on.... and, uh, all of a sudden you have just a huge number of people behaving in the same direction. It's like a flock of whatever, birds, and- or-
- RCRichard Craib
Exactly. What was strange with this one, it wasn't just, "Let's all buy Tesla. We love Elon, we love T- Tesla, let's, let's all buy Tesla." Because that we've heard before, right? Everybody likes, um, Tesla. Well now, now they do.
- LFLex Fridman
(laughs)
- RCRichard Craib
Um, so what they did with this, in this case, they're buying a stock that was bad. They're buying it-
- LFLex Fridman
Yeah.
- RCRichard Craib
... because it was bad, and that's really weird, because that's a little bit, um, too galaxy brain for, for a decentralized community. Um, how did they come up with it? How did they know that was the right one? And the reason they liked it, is because it had really, really high sh- short interest.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
It had been shorted, uh, more than its own, uh, float, I believe. Um, and so they figured out that if they all bought this bad stock, they could short squeeze some hedge funds, and those hedge funds would have to capitulate and buy the stock at really, really high prices.
- LFLex Fridman
Mm-hmm. And we should say that shorted means that th- these are a bunch of people ... When you short a stock, you're betting on the f- on the, uh, you're predicting that the stock is going to go down and then you will make money if it does. And then, um, what's a short squeeze?
- RCRichard Craib
It's really that if you, if you are a hedge fund and you take a big short position in a, in a company, um, there's a certain level at which you can't sustain holding that position.
- LFLex Fridman
Right.
- RCRichard Craib
Uh, there's no limit to how high a stock can go, but there is a limit to how low it can go, right? So if you short something, you have infinite loss potential, and if the stock doubles overnight, like GameStop did, um, you're putting a lot of stress on that hedge fund. And that hedge fund manager might have to say, "You know what? I have to get out of the trade, and the only way to get out is to buy the bad stock that they don't want," like, they believe will go down. Uh, so it's an interesting situation, particularly because it's not zero sum. If you say, "Let's ma- let's all get together and make a bubble in watermelons," you buy a bunch of watermelons, the price goes up, comes down again, it's a, it's a, it's a zero sum game.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
If someone's already shorted a stock and you can make them short squeeze, it's actually a positive sum game. So yes, some Redditors will make a lot of money, some will lose a lot, but actually the whole group will make money, and that's really str- uh, e- that's really why it's, it was such a clever thing for them to, to do.
- LFLex Fridman
And coupled with the fact that shorting, I mean, maybe you can push back, but f- to me always from an outsider's perspective, seemed ... I hope I'm not using too strong of a word, but it seemed almost unethical. Maybe not unethical, maybe ... It's just a asshole thing to do.
- RCRichard Craib
(laughs)
- LFLex Fridman
It's, uh ... Okay, I'm speaking not from an economics or financial perspective, I'm speaking from just somebody who loves ... I'm a fan of a lot of people, I love celebrating the success of a lot of people, and this is like the stock market equivalent of, like, ha- haters. (laughs) I know that's not what it is. I know that there's efficient ... You, you wanna have in the economy an efficient mechanism for punishing, uh, sort of overhyped, overvalued things. That's what shorthand, I guess, is designed for. But it just always felt like these people are just ... Because they're not just betting on the loss of the company. It feels like they're also using their leverage and power to manipulate media, or just to write articles, or just to hate on you on social media when you get to see that with Elon Musk and so on. So, so this is like the man, the sh- the people, like hedge funds that we're shorting are like the, the sort of embodiment of the evil or just the bad guy, the over-powerful that's misusing their power, and here's the crowd, the people that are standing up and rising up. So it's not just that they were able to collaborate on WallStreetBets to sort of effectively make money for themselves, it's also that this is like a symbol of the people getting together and fighting the centralized elites, the powerful. And that, you know ... I don't know what your thoughts are about that in general. At this stage, it feels like that's really exciting that people have power, just like regular people have power. At the same time, it's scary a little bit because, you know, just studying history, people could be manipulated by charismatic leaders. (laughs) And so, like, uh, just like Elon right now is, like, manipulating, uh, encouraging people to buy Dogecoin or whatever, uh, the, the, like, y- there can be good charismatic leaders and there can be bad charismatic leaders, and so it's nerve-racking. It's a little bit scary how much power a subreddit can have to, uh, destroy somebody. Because right now we're celebrating they might be attacking or destroying somebody that everybody doesn't like, but what if they attack somebody that is actually good for this world? So that, and that's kind of the, the awesomeness and the price of freedom, is like it could destroy the world or it can save the world. But at this stage, it feels like ... I don't know, overall when you sit back, do you think this was just a positive wave of emergent behavior? Is there something negative about what happened?
- RCRichard Craib
Well yeah, the, the cool thing is the, they weren't doing anything, the, the Reddit people weren't doing anything, um, exotic. It was an, it was a creative trade, but it wasn't exotic. It wasn't ... It, it was just buying the stock. Okay-
- 16:41 – 18:47
Evil shorting and chill shorting
- RCRichard Craib
- LFLex Fridman
Do you think shorting is, um... Can you speak at a high level just for your own as a person, is it good for the world? Is it good for markets?
- RCRichard Craib
I do think there, that two kinds of shorting, evil shorting (laughs) -
- LFLex Fridman
(laughs)
- RCRichard Craib
... and chill shorting.
- LFLex Fridman
Okay (laughs) .
- RCRichard Craib
Um-
- LFLex Fridman
Chill.
- RCRichard Craib
... evil shorting is what Melvin Capital was doing, um, uh, and it's like you put a huge position down, you get all your buddies to also short it, and you start making press and, um, and trying to bring this company down.
- LFLex Fridman
Yeah.
- RCRichard Craib
Um, and I don't think... In some cases, pe- there's, you go out often to like fraudulent companies and say, "This company is a fraud." Maybe that's okay, like some c- but, but this, they weren't even saying GameStop was a fraud. They're just saying, "It's a bad company, and we're gonna bring it to the ground, bring it to its knees." Um, a quant fund like Numerai, we always have lots of positions, and we never have a position that's like more than 1% of our fund. So we actually have right now 250 shorts. Um, I don't know any of them except for one (laughs) because it was one of the meme stocks.
- LFLex Fridman
(laughs)
- RCRichard Craib
But, um... (laughs)
- LFLex Fridman
Yeah.
- RCRichard Craib
Uh, but it, we're shorting them not to make them go... We don't even want them to go down necessarily.
- LFLex Fridman
Yeah.
- RCRichard Craib
That doesn't, sounds a bit strange that I say that, but we just want them to, to not go up as much as our longs.
- LFLex Fridman
Right.
- RCRichard Craib
So by shorting a, a little bit, we can actually go long more in the things we do believe in. So when we were going long in Tesla...... we could do it with more money than we had because we would borrow from banks, who would lend us money, because we had longs and shorts, because we didn't have market exposure, didn't have market risk. And so I think that's a good thing because that means, um, you know, we can short the oil companies and go long Tesla and make the future come forward faster, and I do think that's not a bad thing.
- 18:47 – 24:20
Hedge funds
- LFLex Fridman
So we've talked about this incredible distributive system created by WallStreetBets and then there's, uh, a platform which is Robinhood which allows investors to efficiently, as far, you can correct me if I'm wrong, but you know, there's those and there's others and there's Numerai that allow you to help make it accessible for people to invest. But, uh, that said, Robinhood was, uh, in a centralized way, applied its power to restrict trading on the stocks that we're referring to. Uh, do you have a thought on actually like, uh, the things that happened? I don't know how much you were paying attention, uh, to sort of the shadiness, uh, around the whole thing. Do you think it was forced to do it or was there something shady going on? Do, what are your thoughts in general?
- RCRichard Craib
Well, I think I, I want to see the alternate history. Like I want to see the counter factual history of them not doing that.
- LFLex Fridman
Not doing it.
- RCRichard Craib
How bad would it have gotten for hedge funds? How much more damage could've been done if the momentum of these short squeezes could continue? Um, what happens when there are short squeezes, uh, even if, um, they're in a few stocks, they affect kind of all the other shorts too and suddenly, um, brokers are saying things like, "You need to put up more collateral."
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
So we had a short. It wasn't GameStop luckily, it was BlackBerry, and it went up like 100% in a day, it was one of these meme stocks, super bad company. The AIs don't like it, okay? The AIs think it's going down.
- LFLex Fridman
What's a meme stock?
- RCRichard Craib
A meme stock is well, kind of an inter- a new term for the stocks that catch memetic momentum on (laughs) Reddit.
- LFLex Fridman
Yeah.
- RCRichard Craib
Um, and so the meme stocks were GameStop, the biggest one, GameStonk as Elon calls it.
- LFLex Fridman
(laughs) .
- RCRichard Craib
AMC (laughs) . Um, and BlackBerry was one, Nokia was one. So these are high short interest stocks as well, so they're, these are targeted stocks. They, uh, some people say, "Oh, isn't it, isn't it adorable that these, um, these people are investing money in these companies that are, you know, nostalgic." It's like, you go into an AMC movie theater, it's like nostalgic. It's like, no.
- LFLex Fridman
(laughs) .
- RCRichard Craib
That's not why they're doing it.
- LFLex Fridman
(laughs) .
- RCRichard Craib
It's that they had a lot of short interest (laughs) , that was the main thing. And so there were high s- chance of, of short squeeze.
- LFLex Fridman
In saying "I would love to see an alternate history," do you have a sense that that, what is your prediction of what that history would've looked like?
- RCRichard Craib
Well, you wouldn't have needed very many more days of that kind of chaos to-
- LFLex Fridman
Right.
- RCRichard Craib
... to hurt hedge funds. Um, I think it's underrated how m- how damaging it could've been, uh, because when your shorts go up, uh, your collateral requirements for them go up. And similar to Robinhood, like we have a prime broker that says, said to us, "Uh, you need to put up, you know, like $40 per, per $100 of short exposure." And then the next day they said, "Actually you have to put up, you know, uh, all of it, 100%."
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
And we were like, "What?" Um, but if that happens, that, if that happens to all the short, all the commonly held hedge fund shorts, because they're all kind of holding the same things.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
If that happens, not only do you have to cover the short, which means you're buying the bad companies.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
You need to sell your good companies in order to cover the short.
- LFLex Fridman
Right.
- RCRichard Craib
So suddenly like all the good companies like, all the ones that the hedge funds like are coming down and all the, all the ones that the hedge funds hate are going up-
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
... and in a cascading way. So I believe that if you could've had a few more days of G- GameStop doubling, AMC doubling, you would've had more and more hedge fund de-leveraging.
- 24:20 – 31:16
Vlad
- RCRichard Craib
- LFLex Fridman
Maybe from your perspective because you...... uh, run, uh, such an organization. And, uh, Vlad, the CEO of Robinhood, sort of had to make decisions really quickly, probably had to wake up in the middle of the night kind of thing. Uh, you know, and he also had a conversation with Elon Musk on, uh, Clubhouse, which I just signed up for. It was, it was a fascinating, one of the great journalistic, uh, performances of our time-
- RCRichard Craib
(laughs)
- LFLex Fridman
... with, uh, Elon Musk-
- RCRichard Craib
Pulitzer Prize for Elon.
- LFLex Fridman
(laughs) Pulitzer Prize. How hilarious would it be if he gets a Pulitzer Prize?
- RCRichard Craib
(laughs)
- LFLex Fridman
(laughs) Uh, and then his Wikipedia would be, like, journalist and, uh, part-time-
- RCRichard Craib
Yeah.
- LFLex Fridman
... entrepreneur.
- RCRichard Craib
Business magnate.
- LFLex Fridman
Elon Musk, business (laughs) magnate. (laughs)
- RCRichard Craib
(laughs)
- LFLex Fridman
As, you know, I don't know if you can comment on any aspects of that, but, like, if you were Vlad, how would you do things differently? What are your just thoughts about his interaction with Elon, how he should have played it differently? Like, I guess there's a lot of aspects to this interaction. One is about transparency, like, how, how much do you want to tell people about really what went down? There's NDAs potentially involved. Uh, how much on, in private do you want to push back and say, "No, fuck you," to centralize power? Whatever the phone calls you're getting, which I'm sure you're, he was getting some kind of phone calls that might not be contractual. Like, it's not contracts that are forcing him, but he was being, uh, what do you call it, like, pressured to behave in certain kinds of ways from all kinds of directions. Like, what, uh, what do you take from, uh, this whole situation?
- RCRichard Craib
I was very excited to see Vlad's response. I mean, it's pretty cool to have him talk to Elon.
- LFLex Fridman
Right.
- RCRichard Craib
And one of the things that, like, struck me in the first, like, few seconds of Vlad speaking was, like, I was like, "Is Vlad like a Boomer?" Like... (laughs)
- LFLex Fridman
(laughs)
- RCRichard Craib
Like, the, but hear me out, like, he seemed like a 55-year-old man-
- LFLex Fridman
Yeah.
- RCRichard Craib
... talking to a 20-year-old.
- LFLex Fridman
Yeah.
- RCRichard Craib
Elon was, like, the 20-year-old.
- LFLex Fridman
Yeah.
- RCRichard Craib
And he's, like, the 55-year-old man.
- LFLex Fridman
Yeah.
- RCRichard Craib
You can see why Citadel are, and him are buddies, right?
- LFLex Fridman
(laughs)
- RCRichard Craib
Like, you can.
- LFLex Fridman
Yeah.
- 31:16 – 58:32
Numerai
- LFLex Fridman
So let's talk about Numerai, which is an incredible company, uh, system idea, I think. But good place to start, what is Numerai and how does it work?
- RCRichard Craib
So Numerai is the first hedge fund that gives away all of its data. So this is like probably the last thing a hedge fund would do, right? Why would we give away our data? It's like giving away your edge. Um, but the reason we do it is because we're looking for people to model our data. And the way we do it is by obfuscating the data. So when you get, when you look at Numerai's data that you can download for free, it just looks like, like a million rows and of numbers between zero and one, and you have no idea what the columns mean. But you do know that if you're good at machine learning or have done re- regressions before, you know that I can still find patterns on, in this data even though I don't know, I don't know what the features mean.
- LFLex Fridman
And, and the data itself is time series data, and wh- even though it's obfuscated, anonymized, what is the source data, like approximately? What are we talking about?
- RCRichard Craib
S- so we are buying a data from lots of different data vendors. Um, and they would also never want us to share that data. Um, so we have strict contracts with them. So we only sp- we only can... But it, but that's the kind of data you could never buy yourself unless you had maybe a million dollars a year of budget to buy data. So what happened with the hedge fund industry is you have a lot of talented people who used to be able to trade, and still can trade, but now they have such a data disadvantage, it would never make sense for them to, um, to, to, to trade themselves.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
But Numerai, by giving away this obfuscated data, we can give them a really, really high quality dataset that's, that would otherwise be very expensive, and they can use whatever new machine learning technique they want, uh, to find patterns in that data that we can use in our hedge fund.
- LFLex Fridman
And so how much variety is there in the underlying data? We're talking about, uh, I apologize if I'm using the wrong terms, but there, one is just like the stock price. The other, there's like options and all that kind of stuff, like the, what are they called? Order books or whatever. The, like, I- I- is, is there maybe other totally unrelated to directly to the stock market data, like, uh, l- like, uh, natural language as well, all that kind of stuff?
- RCRichard Craib
Yeah. We're really focused on, um, stock, data that's specific to stocks. So, um, things like you can have like a P- every stock has like a PE ratio. For some stocks, it's not as meaningful, but e- every stock has that. Every stock has one year momentum, how much they went up in the last year. Um, those are very common factors. But we try to get lots and lots of those factors that we have for many, many years, like 15, 20 years history. Um, and, and then the setup of the problem is commonly in, in quant called like cross-sectional global equity. You're not really trying to say, "I want ... I, I believe this stock will go up."
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
You're trying to say, um, the like relative position of this stock in feature space, uh, makes it not a bad buy in a, in a portfolio.
- LFLex Fridman
So it captures some period of time, and you're trying to find the patterns, the dynamics captured by the data over that period of time in order to make short-term predictions about what's going to happen?
- RCRichard Craib
Yeah. So our prediction's also not that short. We're not really, um, caring about things like order books and, and, and, and tick data, uh, not high frequency at all.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
We're actually holding things for quite a bit longer. Uh, so our prediction time horizon is about one month. We end up holding stocks for maybe like three or four months. So I kind of believe that's a little bit more like investing than, um, than kind of plumbing.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
Like, to go long a stock that's mispriced on one exchange and sh- short on another exchange, that's just arbitrage.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
But what we're trying to do is really know, know, know something more about the longer term future of the stock.
- LFLex Fridman
Yeah. So from the patterns, from these like periods of, uh, time series data, you're trying to understand something fundamental about the stock, not like d- about deep value, about like what is big in the context of the market. Is it underpriced, overpriced? All that kind of stuff. So like, this is about investing. It's not about like, uh, just like you said, high frequency trading, which I think is a fascinating open question from a machine learning perspective. But just to like sort of build on that, so you've anonymized the data and now you're giving away the data, and then now anyone can try to, uh, build algorithms that make investing decisions on top of that data or predictions and on top of that data.
- RCRichard Craib
Exactly.
- LFLex Fridman
And so that, that's, um, what does, so what does that look like? What's the goal of that? What are the underlying principles of that?
- RCRichard Craib
So the first thing is, you know, we could obviously model that data in-house, right? We can make-... an XGBoost model on the data, um, and that would be quite good too. But what we're trying to do is by, by, uh, opening it up and letting anybody participate, uh, we can do quite a lot better than if we modeled it ourselves.
- LFLex Fridman
Right.
- RCRichard Craib
And a lot better on the stock market, doesn't need to be very much. Like, it really matters the difference between if you can make 10 and 12% in an equity market mutual hedge fund because the whole... usually you're char- you're charging 2% fees. So, if you can do 2% better, that's like all your fees w- it's worth it. So, we're trying to make sure that we always have the best possible model. As new machine learning libraries come out, new, new techniques come out, they get automatically synthesized. Like, if there's a great paper on supervised learning-
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
... someone on Numerai will figure out how to use it on Numerai's data.
- LFLex Fridman
And is there an ensemble of, uh, models going on or is it always... or is it more towards kind of like one or two or three, like, best performing models?
- RCRichard Craib
So the way we decide on how to weight all of the predictions together is, um, by how much the users are staking on them.
- LFLex Fridman
Oh, yeah.
- RCRichard Craib
How much of the cryptocurrency that they're putting behind their models. So they're saying, "I believe in my model. Tru- you can trust me because I'm gonna put skin in the game."
- 58:32 – 1:04:11
Futre of AI in stock trading
- RCRichard Craib
- LFLex Fridman
If we look into the future, do you think it's possible that Numerai-style infrastructure or AI systems backed by humans are doing the trading is what the entirety of the m- the stock market is, or the entirety of the economy is run by basically this army of AI systems with high-level human supervision?
- RCRichard Craib
Yeah. The thing is that some of them could be- could be bad actors. Um...
- LFLex Fridman
Some of the humans?
- RCRichard Craib
No. Well, in- these systems could be tricky.
- LFLex Fridman
Right.
- RCRichard Craib
So actually, I once met a hedge fund manager, and this is kind of interesting. He said, um, very famous one, and he said, um, "We can see- sometimes we can see things in the market where we know we can make money, but it will mess shit up."
- LFLex Fridman
Yeah.
- RCRichard Craib
"We know we can make money, but it will mess things up, and we choose not to do those things." And on the one hand, maybe this is like, oh, you're being super arrogant, d- like, you know-
- LFLex Fridman
Yeah.
- RCRichard Craib
... of course you can- you can't do this, but maybe he can, and maybe he really isn't doing things he knows he could do but would m- change, you know, be pretty bad. Would the Reddit army have that kind of, uh, morality or concern, uh, for what they're doing?
- LFLex Fridman
Yeah.
- RCRichard Craib
Probably not, based on what we've seen.
- LFLex Fridman
T- The madness of crowds. There would be like one person that says, "Hey, maybe..." And then they get trampled over.
- RCRichard Craib
(laughs)
- LFLex Fridman
Uh, that's- that's the terrifying thing actually, this, uh... Like a lot of people have written about this, is somehow that, like, little voice that's human morality gets silenced when we get into groups and start chanting.
- RCRichard Craib
Yeah.
- LFLex Fridman
(laughs) And that's terrifying. But like, I- I think, uh, maybe I misunderstood. I thought that, um, you were saying AI systems could be dangerous, but you just described how humans can be (laughs) dangerous.
- RCRichard Craib
So...
- LFLex Fridman
So which is safer? (laughs)
- RCRichard Craib
(laughs) So I mean, one thing is, uh, (laughs) Numerai- yeah, so WallStreetBets, these kinds of like- these kinds of attacks, like it's not possible to- to model numerized data and then come up with the idea from the model, let's short squeeze GameStop.
- LFLex Fridman
Right.
- RCRichard Craib
It's not even framed in that way, it's not like-
- LFLex Fridman
(laughs)
- RCRichard Craib
... possible to have that idea. So- but it is possible for like kind of a bunch of humans. So I think this- it's- Numerai could get very powerful...... uh, without it being dangerous. But WallStreetBets needs to get a little bit more powerful and it'll be pretty dangerous.
- LFLex Fridman
(laughs)
- RCRichard Craib
(laughs)
- LFLex Fridman
Yeah. Well, I mean, uh, so this is a good place to kind of think about Numerai data today, uh, and Numerai Signals and what that looks like in 10, 20, 30, 50, 100 years. You know, like right now, I guess, maybe you can correct me, but this- the data they were working with is like a window. It's a- a s- you know, anonymized obfuscated window into a particular aspect, uh, a time period of the market. And, you know, you can expand that more and more and more and more, potentially. You can imagine in different dimensions to where it encapsulates all the things that, uh, where you could, uh, include kind of human to human communication that was available for like, uh, to buy GameStop, for example, on- on WallStreetBets. So maybe just a step back, can you speak to what is Numerai Signals and, uh, what are the different datasets that are involved?
- RCRichard Craib
So with Numerai Signals, um, you're still providing, uh, predictions to us, um, but you can do it from your own dataset. So Numerai tool, you have to model our data to come up with predictions. Numerai Signals is whatever data you can find out there, you can turn it into a signal and give it to us. So it's a way for us to import signals on data we don't yet have.
- LFLex Fridman
Mm-hmm.
- 1:04:11 – 1:07:53
Numerai data
- LFLex Fridman
fascinating. So on the Signal side, what's the vision? Just long term, what do you see that becoming?
- RCRichard Craib
So we wanna manage all the money in the world. That's Numerai's mission. And to get that, we need to have all the data and have all of the talent. Like, there's no way, for- from first principles, if you had really good modeling and really good data that you would lose, right? Um, it's just a question of how much do you need to get- to get really good. So Numerai already has some really nice data that we give out. This year, we are 10Xing that, and I actually think we'll 10X the amount of data we have on Numerai every year for at least the next 10 years.
- LFLex Fridman
Wow.
- RCRichard Craib
So it's gonna get very big, the data we give out. And Signals is more data. People with any other random dataset can turn that into a signal and give it to us.
- LFLex Fridman
And in some sense, that kind of data is the edge cases, the weirdness, is the... So you're focused on like the bulk-
- RCRichard Craib
Yeah.
- LFLex Fridman
... like the main data, and then there's just, like, weirdness from all over the place that just come- enter through this backdoor of Numerai Signals (laughs) .
- RCRichard Craib
Exactly (laughs) . Exactly. And, uh, it's- it's also, um, a little bit shorter term.
- LFLex Fridman
Hmm. Right.
- RCRichard Craib
So the Signals are se- about a seven-day time horizon, and the- on Numerai it's like a 30 day. So it's often for h- faster sp- situations.
- LFLex Fridman
You've written about a ma- master plan y- and you've mentioned, which I love, uh, in a similar sort of style of big style of thinking, you would like Numerai to manage all of the world's money. Uh, so how do we get there from- from yesterday to several years from now? Like what's, uh, what is the plan?
- RCRichard Craib
So...
- LFLex Fridman
You've already started to- to allude to it, it's like get all the data and get, uh-
- RCRichard Craib
Yeah.
- LFLex Fridman
... all the hu- talent-
- RCRichard Craib
Yeah.
- LFLex Fridman
... humans, models.
- RCRichard Craib
Exactly. I mean, the important thing to note there is what would that mean, right? And I- I think the biggest thing it means is like, uh, if there was one hedge fund, um, you would have, uh, not so much talent wasted on all the other hedge funds. Like it's super weird-
- LFLex Fridman
Yeah.
- RCRichard Craib
... how the industry works. It's like one hedge fund gets a data source and hires a PhD, and another hedge fund has to buy the same data source and hire a PhD, and suddenly a third of American PhDs are working at hedge funds-
- LFLex Fridman
Yeah.
- RCRichard Craib
... and we're not even on Mars.
- LFLex Fridman
(laughs)
- RCRichard Craib
And like so in some ways, Numerai, it's all about freeing up people who work at hedge funds to go work for Elon.
- LFLex Fridman
(laughs) Yeah. And, and also the people who are working, uh, on Numerai problem, it feels like a lot of the knowledge there is also transferable to other domains.
- RCRichard Craib
Exactly.
- LFLex Fridman
It's, it's-
- RCRichard Craib
Our top... One of our top users is, uh, he works at NASA Jet Propulsion Lab.
- LFLex Fridman
Yeah.
- RCRichard Craib
And he's, he's like amazing. I went to go visit him there, and it's like, he's got like Numerai posters, and he's like... It's, it's like... It looks like, you know, the movies, like it looks like Apollo 11 or whatever. Yeah. The, the point is, he didn't quit his job to join-
- 1:07:53 – 1:11:48
Is stock trading gambling or investing?
- LFLex Fridman
You mentioned, uh, briefly that stock markets are good. Uh, for my sort of outsider perspective, is there a sense... Do you think trading stocks is, uh, closer to gambling or is it closer to investing? Sometimes it feels like it's gambling, uh, as opposed to betting on companies to succeed. And this is maybe connected to our discussion of shorting in general but... Like, from your sense, the way you think about it, is it fundamentally still investing?
- RCRichard Craib
I do think, um... I mean, it's a good question. It, I... It's... Uh, I've a- I've also seen lately, like people say, "Oh, this is like speculation. Is there too much speculation in the market?"
- LFLex Fridman
Yeah.
- RCRichard Craib
And it's like, but all the trades are speculative.
- LFLex Fridman
Right.
- RCRichard Craib
Like all the trades have a horizon, like people want them to work. Um, uh, so I, I, I, I would say that, um... And there's certainly a lot of aspects of gambling, uh, math that applies to investing.
- LFLex Fridman
Right.
- RCRichard Craib
Like, one thing you don't do in gambling is put all your money in one bet. You have bankroll management, and it's a key part of it. And small alterations to your bankroll management might be better than s- improvements to your skill. Um, so there... And then there are things we care about in our fund, like we wanna make a lot of independent bets.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
We talk about it, like we're, we want to make a lot of independent bets because there, that's gonna be, um, a higher sharp than if you have a lot of bets that depend on each other, like all in one sector. Um, but, but yeah, I mean, the point, the... The point is that you want the prices of the stocks to be, to be reflective of, of how... of their value.
- LFLex Fridman
Of the underlying value of the company, yeah.
- RCRichard Craib
Yeah, like... Yeah, you shouldn't have there be like a f- a hedge fund that's able to say, "Well, um, I've looked at some data and all of this stuff's super mispriced." Like-
- LFLex Fridman
Okay.
- RCRichard Craib
... that's super bad for society if it's... if it looks like that to someone.
- LFLex Fridman
I g- I guess the, the underlying question then is, uh, do you see that the market often like drifts away from the underlying value of companies and it becomes a game in itself? Like would these, whatever they're called, like derivatives, like the optio... Like, you know, um, options and, uh, shorting and all that kind of stuff, it's like layers of game on top of the actual, like what you said, which is like the basic thing that WallStreetBets was doing, which is like just buying stocks?
- RCRichard Craib
Yeah. There are a lot of, uh, games that people play that are, um, uh, in the derivatives market. And I think a lot of the stuff people dislike when they look at the history of, of what's happened, they hate like credit default swaps, uh, or s- collateralized debt obligations. Like these are the, these are like kind of like enemies of 2008. And then the long-term capital management thing, it was like, it was like they had 30 times leverage or s- or something just re- that no one... Like you could just go to, um, a gas station and ask anybody at the gas station, "Is it a good idea to have 30 times leverage?" And they'd just say no.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
It's like common sense just like went out the window. So the... I... Yeah. I, I don't, I don't, I don't respect long-term capital management. (laughs)
- LFLex Fridman
(laughs)
- RCRichard Craib
Uh, okay. But Numerai doesn't actually use any derivatives, unless you call shorting a derivative.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
Uh, we just... We do put money into companies. We... And the... That does help the companies we're investing in. It's just in little ways. Um, we, we really did buy Tesla.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
And it, and it did... And we were, you know... We were, we were not, um... We pa- played some role in, in that s- its success. Super small, (laughs) make no mistake. But still, I think that's important.
- 1:11:48 – 1:15:05
What is money?
- RCRichard Craib
- LFLex Fridman
Can I ask you, um, a pothead question, which is, uh, what is money, man?
- RCRichard Craib
(laughs)
- LFLex Fridman
(laughs) So if we just kinda zoom out and look at... Uh, 'cause I'd love to talk to you about cryptocurrency, which perhaps could be the future of money. In general, how do you think about money? You said Numerai, the, the vision, the goal is to, to run... to manage the world's money. What is money, in your view?
- RCRichard Craib
I don't have a, a good answer to that. But it's definitely... In my personal life, it's become more and more, uh, warped. Um, and you start to care about the real thing, like what's really going on here. Um, Elon has a... He talks about things like this, like what's... what is a company really? And it's like, it's a bunch of people who like kinda show up to work together and like-
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
... they, they solve a problem. And there might not be a stock out there that, that, that's trading that represents them, what they're doing, but it's, it's not the real thing.... um, and being involved in crypto, um, like I- I early put in c- crowd sale of, of Ethereum and, uh, and all these other things and, and different crypto hedge funds and things that I've invested in. And it's like, it's just, it's just kind of like, it feels like how I used to think about money stuff is just, it's just, like, totally warped, um, because you... Yeah, you kind of, you stop caring about, like, the, the, the price, and you care about, like, the product.
- LFLex Fridman
So but, but, but the product, you mean, like, the different mechanisms that money is exchanged? I mean, m- money is ultimately a kind of a little, uh, you know ... on one, it's a store of wealth, but it's, it's also a mechanism of exchanging wealth. But that, like, what, what wealth means becomes a totally different thing, especially with, uh, cryptocurrency to where it's almost like these little contracts, these little agreements, these transactions between human beings that represent something that's bigger than just, like, cash being exchanged at 7-Eleven, it feels like.
- RCRichard Craib
Yeah. Maybe
- NANarrator
(laughs)
- RCRichard Craib
... I'll answer, what is finance? Uh, like you ... It's what are you doing when you can... when you have the ability to, to take out a loan. You can bring, uh, a whole new future into being with finance. Uh, if you couldn't get a student loan to get a college degree, you couldn't get a college degree, like, if you didn't have the money. But now, like, weirdly, you can get it with ... And like, yeah, all, all you have is this, like, loan, which is like, so now you can bring, you can bring a different future into the world. And that's how I ... when I was saying earlier about if you rerun American history, economic history, without these, these, these things, like you're not allowed to take out loans, you're not allowed to have, have derivatives, you're not allowed to have money, um, it would just... it just doesn't really work.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
And it's a really magic thing how, how, how much you can do with finance by kind of bringing the future f- forward.
- LFLex Fridman
Finance is empowering. It's, uh ... We sometimes forget this, but yeah, it enables innovation, it enables big risk-takers and bold builders that ultimately make this
- 1:15:05 – 1:18:22
Cryptocurrency
- LFLex Fridman
world better. Uh, you said you were early in on cryptocurrency. Can you give your high-level overview of just your thoughts about the past, present, and future of cryptocurrency?
- RCRichard Craib
Um, yeah. So my friends told me about Bitcoin, and I, I was interested in, um, equities a lot. And I was like, "Well, it has no net present, uh, value. It has no future cash flows. Bitcoin pays no dividends." Um, so I really couldn't get my head around it, uh, like that this could be valuable. Um, and then I ... But I did... So I f- I didn't feel like I was early in cryptocurrency, in fact-
- LFLex Fridman
(laughs)
- RCRichard Craib
... 'cause I was like, it was like 2014, it felt like a long time (laughs) after Bitcoin. Um, and then, but then I, I, I really liked some of the things that, uh, Ethe- Ethereum was doing. It seemed like a super visionary thing, like I was reading something that was, um, that was just gonna change the world when I was reading the white paper. Um, and I liked the different constructs you could have inside of E- Ethereum that you couldn't have on, on Bitcoin.
- LFLex Fridman
Like smart contracts and all that kind of stuff?
- RCRichard Craib
Exactly, yeah. And, and even the ... There were ... Yeah, even spoke about different, uh, yeah, different constructions you could have.
- LFLex Fridman
Yeah, that's a cool dance between Bitcoin and Ethereum of j- it's in the space of ideas. It feels so young. Like, I wonder what cryptocurrencies will look like in the future, like if Bitcoin or Ethereum 2.0 or some version will stick around, or any of those. Like, who's gonna win out or if there's even a concept of winning out at all. Is there, uh, a cryptocurrency that you're especially find interesting that, uh, technically, financially, philosophically, you think is, is, uh, something you're keeping your eye on?
- RCRichard Craib
Well, I don't really ... I'm not looking to, like, invest in cryptocurrencies anymore. Um, but I, I ... They are... I mean, the... They're m- and many are almost identical. I mean, there's not... there wasn't too much difference, um, between even Ethereum and Bitcoin in, in some ways, right? Uh, but there are some that... I like the privacy ones. I mean, I was like, "Z-" I like Zcash for its, like, coolness. It's actually ... Um, it's, it's like a different kind of invention compared to some of the other things.
- LFLex Fridman
Okay. Can you speak to, just briefly, to privacy? What... Is there some mechanisms of preserving some privacy of the inves- so o- I guess everything is public.
- RCRichard Craib
Yeah, um-
- LFLex Fridman
Is that the problem?
- RCRichard Craib
... the, yeah. None of the transactions are private.
- LFLex Fridman
Yes.
- RCRichard Craib
Um, and so, you know, even ... Like (laughs) I have some of my, I have some Numeraire, and you can just see it. In fact, you can go to a website and it says like, you can go to, like, Etherscan and it'll say like, "Numeraire founder."
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
Uh, and I'm like, "How the hell do you guys know this?"
- LFLex Fridman
(laughs)
- RCRichard Craib
(laughs)
- LFLex Fridman
So they can reverse engi- the new, whatever that's called.
- RCRichard Craib
Yeah, and so they can see-
- LFLex Fridman
De-anonymized data.
- RCRichard Craib
... me move it, too. They can see me-
- LFLex Fridman
Yeah.
- RCRichard Craib
"Oh, why is he moving it?"
- LFLex Fridman
Yeah.
- RCRichard Craib
Um, so, uh, so-
- LFLex Fridman
Yeah.
- RCRichard Craib
... (laughs) but yeah, Zcash, I mean, they ... Also, when you can make private transactions, you can also play different games.
- LFLex Fridman
Yes.
- RCRichard Craib
Um, and, uh, it's unclear and it's like what's quite cool about Zcash is I wonder what games are being played there.
- 1:18:22 – 1:22:52
Dogecoin
- RCRichard Craib
know.
- LFLex Fridman
Uh, so from a, from a deeply analytical perspective, uh, can you describe why Dogecoin is going to win?
- RCRichard Craib
(laughs)
- LFLex Fridman
Which it surely will. Like, it, it very likely will take over the world, and once we expand out into the universe, it will take over the universe. Uh, or on a more serious note, like, what are your thoughts on the recent success of Dogecoin, where you've spoken to sort of the, the meme stocks, the memetics of the whole thing, that it feels like...... the joke can become the reality, like the m- the meme, the joke has power in this world.
- RCRichard Craib
Yeah.
- LFLex Fridman
Which is fascinating.
- RCRichard Craib
Exactly.
- LFLex Fridman
(laughs)
- RCRichard Craib
It's, uh, it's-
- LFLex Fridman
(laughs)
- RCRichard Craib
... it's like, why is it correlated with Elon tweeting about it?
- LFLex Fridman
It's not just Elon alone tweeting, right? It's like Elon tweeting and that becomes a catalyst for everybody on the internet, kind of like spreading the joke, right?
- RCRichard Craib
Exactly.
- LFLex Fridman
The joke of it, so it's- it's- it's the- the initial spark of the fire for WallStreetBets type of situation.
- RCRichard Craib
Yeah.
- LFLex Fridman
And that's fascinating because jokes seem to spread faster than other mechanisms.
- RCRichard Craib
Yeah.
- LFLex Fridman
Like funny shit sp- (laughs) is very effective at, uh, captivating the, uh, like the discourse on the internet. (laughs)
- RCRichard Craib
Yeah, and I think you h- can have, um, like the... I like the one meme, like, "Doge, I haven't heard that name in a long time." (laughs)
- LFLex Fridman
(laughs) Yeah.
- RCRichard Craib
Um, like, I think back to that meme often.
- LFLex Fridman
(laughs)
- RCRichard Craib
That's like funny.
- LFLex Fridman
Yeah.
- RCRichard Craib
And every time I think back to it, there's a little probability that I might buy some-
- LFLex Fridman
Buy some Dogecoin.
- RCRichard Craib
Right?
- LFLex Fridman
Yeah.
- RCRichard Craib
And so-
- LFLex Fridman
(laughs)
- 1:22:52 – 1:38:43
Advice for startups
- RCRichard Craib
- LFLex Fridman
You're running a successful company and it's just interesting 'cause my mind has been in that space of, uh, potentially just being one of the millions of other entrepreneurs. Uh, what's your advice on, uh, how to build a successful startup? How to build a successful company?
- RCRichard Craib
I think that one thing I- I do like, and I... it might be a particular thing about America, but, like, there is something about, like, playing... tell people what you really want to happen in the world.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
Like, don't... Stop. It- it's not... it's not gonna make it, um... like if you're asking someone to invest in your company, don't say, "I think, uh, maybe one day we might make a million dollars."
- LFLex Fridman
Yeah.
- RCRichard Craib
Um, when you actually believe something else, you actually believe... you're actually more optimistic, but you're toning down your optimism-
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
... because you wanna appear, um, like low risk.
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
But actually it's super high risk if your company becomes mediocre-
- LFLex Fridman
Mm-hmm.
- RCRichard Craib
... because no one wants to work at a mediocre company, no one wants to invest in a mediocre company.
- LFLex Fridman
That's right.
- RCRichard Craib
Um, so you should play the real game. Um, and obviously this doesn't apply to all businesses, but if you play a venture backed startup kind of game, like play for keeps, play to win, go big, um, and it's very hard to do that. I always feel like, um, I... yeah, I start... you can start narrowing- narrowing your focus because 10 people are telling you, you know, you gotta care about this boring thing that won't matter five years from now.
Episode duration: 1:49:55
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