Razor's Edge: The Pac-Man Pod Market

I really enjoyed this article on the Squid Game Stock Market which got me thinking about something everyone in the market needs to ask themselves….

Why did you come to the market?

It seems like a simple question. The answer often should go something like…”to invest my savings, to make some extra money, to plan for kids/retirement”.

But while these goals might underpin the core stated journey for all in reality many people come to the market without really being honest about their goals. I have a lot of experience with this phenomenon. Some people just want hobby, some are genuinely seeking self-actualization, some just want to scratch a gambling itch in a place where the statement of gains/losses can be called investing if nobody looks too close at it. I’ve dealt with every permutation good or bad with respect to this over the years. Like I legit can’t answer a basic "pick a stock" market’s question anymore from a friend or family member because I know the end game of that convo, and the historical personal experience data overwhelmingly says to politely change the topic of conversation.

Anyway, I am asking this question because there is a lot of chatter recently about POD shops blowing up, and I think now is a good time to share my view on these operations and their impact on financial markets. Yes, some might struggle to see the analogy with individual investors but bear with me.

My 2c on markets for the past few years have been that for most names’ prof investors/traders are interested in; the pods are what matter the most active strategy wise.

Pods are an exercise in risk mgmt. that has worked amazingly well for many years. Over the past few years, I've realized a lot of older professional active long/short investors understand very little about how these shops work which is ironic because they are setting price in most of the stocks they trade. But for those who don’t understand pods, they really boil down to a platform investment model seeking to achieve an active mgmt. sample size that allows for the isolation of “skill” in markets. The age-old question in markets of what is luck and what is skill is one the pods aim/claim to have conquered, and for the trailblazers in this space it’s hard to argue with the performance history.

If you are a pro and don’t get it, think of someone like Nick Sleep who has a reputation based on holding two stocks for seemingly forever. The math on that says you would need over 100 years of data to get a good enough sample to compare him against an active manager with 25 names held for one quarter.

Is he lucky or is he skillful?

We will probably never know from a replicable strategy standpoint, but then again he will tell you he never set out to do that and that there is very little for you to try and replicate.

So, that’s probably not a great compare, but even an investor with an avg holding period of 5 years and let’s say a dozen position needs 20 plus years of data if we are playing this game. Anyway, the pods know you can’t totally eliminate luck, but they do work very hard to reduce pre-event luck to as low as possible. To the extent they are too successful at that then in theory one day you will have a problem because you can replicate this investment strategy versus a seemingly intangible strategy from a Munger or Sleep.

Basically, Pod proliferation should eventually have its own unintended consequences. This is a basic law of financial products or markets. Any product or strategy that succeeds for very long and is replicated will eventually have its blow-up moment.

Some folks would argue this just happened in equity markets. And if you can tell the difference between a pod stock and a non-pod stock; the data does support this type of conclusion.

Now, without really calling out the Pod investment model, I have recently spent a good deal of time poking at the positioning and setup convos as almost all uniformly unstimulating and anti-edge suddenly. My alpha counter lately has been to overindex to the business/customers/competitors of any stock I'm trading and to tune out the "print preview".

I basically have felt the need to chip away at some of the underlying thinking in this form of investing.

Because It’s very hard to not talk a stock today without having the positioning/bogeys/3p checks/sell-side color/retail momo etc. takes on everything “into the print”. Earnings is now like Sunday NFL football with respect to these convos, and whether you like it or not this how a lot of money is run.

But if the same analysts at 100 pods are using the same 3p data/ have the same non-consensus numbers/and agree the sell-side is off/attend the same conferences/ you might have some crowding right?

That’s just common sense.

But what about if they all also have the same very strict risk mgmt. parameters?

And if they all are levered 5x+?

Well, then you could have scenarios where big beats as measured by their pre-existing “skill” workflow/edge really are already priced in and then some. Think Reddit the last quarter and how it traded pre- and post-print. I say that because after a very short stint shorting it in December via puts; I felt really stupid once I got on top of all the “Checks”. You knew immediately reddit was going to be bulletproof essentially until earnings, and you saw this in applovin and many other stocks where I can easily go back and show you the pod reflexivity problem manifesting itself.

Crowding applies to everything in life, but in markets it can lead to wild distortions.

Hypothetical Analyst Alpha has picked up on an intra quarter acceleration at Reddit during the quarter using the same subset of checks as his peers at every other firm running the same type of capital. Consequently, he over indexes to acceleration as his trading history has told him he should and he’s less concerned with valuation as he’s looking for his edge to play out/be confirmed on print. The stock takes off and by the print time the edge really doesn’t look as edgy and just enough doubt on what’s next comes in about renting this any longer. So, you sell.

The problem here really isn’t the over indexing to whatever qualitative factors the analyst used to get into the stock. The discipline/process there is fine. The issue is the risk mgmt model calls for him to be in stocks that are easy to exit and enter which means what he ends up holding, i.e. renting the longest, starts to look not very different across his fellow pods.

But the pods are risk mgmt. machines which generally means they obsess over the universe and positioning and the possibility that they end up overcrowding into something. They do this to avoid a blow-up scenario. So, one can surmise that these firms know that since their analysts and pms all operate the same they will eventually get too crowded, and consequently the best way to counter this is to unwind what has worked early because the historical data driving it is now a source of risk.

So, maybe some kind of macro run maybe leads to this happening and for some people it looks like a market crisis, but really it’s just a reminder of how market structure changed and is course correcting.

I pointed out a Kuppy post a few weeks ago calling the pods his source of alpha because I thought it was spot on, but also because you kind of don’t want to advertise this dynamic. Cause for a certain universe of stocks if you are not at a pod you are trading against them, which means your alpha really is sitting and waiting for their risk mgmt. to create opportunities as you are not likely to beat them on information.

Excerpt from his post:

I see this group as the newest and greatest source of Alpha in the markets. While I figure that most of these pod-shops will eventually liquidate in a cataclysm of margin calls, I intend to harness them for as long as possible before then. They’re the new meme bros, and they’re the new ESG mandates. They’re the idiots in the room, the pinata that we’re all supposed to swing the bat at. They’ve had it too easy, as too many traders focus on price action, and then get bullied by the pods as they paint the tape. Too many long-side traders still believe that mainstream media is actually reporting, as opposed to reading a script that’s paid for by pods. Not enough guys are willing to trust their research and stand in there, absorbing cheap stock from the pod bros who are shorting it.

Now, I’ve gotten to know quite a few pod folks over the past couple of years, and I definitely don’t see them as the idiots in the room. But I do think the strategy has had it too easy and that is changing. Ai kind of has arrived at the perfect time for that.  And SaaS is feeling the brunt of this because the same investing rules the pods have followed are not working like they used to in this space.

Now, it’s very hard to be 100% certain as to why, but my theory is the terminal value dynamics are in serious flux around ai changes. So, valuation as a whole is an ever-changing exercise as “edge” has changed.

Which brings me back to the Squid Game Market…

 Now, $112B is chump change compared to total U.S. equity market cap of $62T (only 0.2%). But in some small corners of the market, Korean retail investors are major players.

Let’s look at the evidence as of late-February 2025. Here and elsewhere, my data comes from the Korea Securities Depositary and covers retail traders only (not institutional).[2] Korean retail investors own 31% of the shares of one prominent quantum computing stock and 17% of another one. They own 19% of an AI-related firm involved in small modular reactors. In leveraged ETFs on stocks and crypto, they often own more than 20% of shares outstanding. Among their top-50 U.S. holdings are eight leveraged ETFs, including a 2X single-stock ETF where they own 40%.

I’ve argued many times that you need to know who’s in the stocks you trade, and that early on in my career I had such little appreciation for this.

If I’m going to write a short report on a USA listed company in English and its 70% traded by people who only speak Hindi and my risk mgmt. demands I close in 48hrs, well, my strategy is clearly flawed and likely to fail. The market as a whole is increasingly a collection of this type of fragmentation.

I have explained my thinking on this to dedicated short-sellers in the past year. I went after envx/soun with tbh nothing empirically novel because I was certain 150 other people could write a comprehensive fundamental short thesis on those stocks, and that it wouldn't matter. And clearly you could see for many of these shitco names that that had not worked. But what I felt would work is pointing out the obvious comical nature of the tech in question by using memes to highlight recent industry developments that made these companies look like dinosaur’s strategy wise. I felt that with some better timing might actually matter to the longs in the names.

So if your short soundhound, knowing Nvidia might sell soon is your real catalyst edge. And making fun of the fails of regulators and mgmt. only matters after the stock has become an absurd financial instrument. A basic rule of shitco pump shorting is that you have to accept the necessary conditions of irrationality that create the opportunity before you make the opposing bet which means you don’t get to scream this is stupid human when its blowing u up. And this is why I rarely short shitcos anymore and almost have never targeted them activist wise.

If I write a report about a solid business whose about to run into structural issues, I know the investors on the other side will care about that if I’m right versus who the coo’s cousin used to sleep with in college. Or if I go after a stock a mid-cap tech stock a bunch of mutual funds think is the next paycom, I know they will sell immediately when real customer losses materialize.

 Anyway, I titled this post the Pac-Man market because I view pods as video gamers more than business investors. Their goal is to accumulate points forever with the amount of lives they have been given. That’s it. And if this is a big part of the market then well saying you are a buy and hold investor doesn’t mean the same thing it used to if you can’t spot the perpetual renters in your portfolio driving the price action.