Richard Craib is the founder of Numerai, a crowd-sourced, AI-run stock trading system. Please support this podcast by checking out our sponsors:
- Audible: https://audible.com/lex to get $9.95 a month for 6 months
- Tryolabs: https://tryolabs.com/lex
- Blinkist: https://blinkist.com/lex and use code LEX to get 25% off premium
- Athletic Greens: https://athleticgreens.com/lex and use code LEX to get 1 month of fish oil

EPISODE LINKS:
Richard's Twitter: https://twitter.com/richardcraib
Numerai's Twitter: https://twitter.com/numerai
Numerai's Website: https://numer.ai

PODCAST INFO:
Podcast website: https://lexfridman.com/podcast
Apple Podcasts: https://apple.co/2lwqZIr
Spotify: https://spoti.fi/2nEwCF8
RSS: https://lexfridman.com/feed/podcast/
Full episodes playlist: https://www.youtube.com/playlist?list=PLrAXtmErZgOdP_8GztsuKi9nrraNbKKp4
Clips playlist: https://www.youtube.com/playlist?list=PLrAXtmErZgOeciFP3CBCIEElOJeitOr41

OUTLINE:
0:00 - Introduction
2:28 - WallStreetBets and GameStop saga
16:41 - Evil shorting and chill shorting
18:47 - Hedge funds
24:20 - Vlad
31:16 - Numerai
58:32 - Futre of AI in stock trading
1:04:11 - Numerai data
1:07:53 - Is stock trading gambling or investing?
1:11:48 - What is money?
1:15:05 - Cryptocurrency
1:18:22 - Dogecoin
1:22:52 - Advice for startups
1:38:43 - Book recommendations
1:40:45 - Advice for young people
1:44:46 - Meaning of life

SOCIAL:
- Twitter: https://twitter.com/lexfridman
- LinkedIn: https://www.linkedin.com/in/lexfridman
- Facebook: https://www.facebook.com/LexFridmanPage
- Instagram: https://www.instagram.com/lexfridman
- Medium: https://medium.com/@lexfridman
- Reddit: https://reddit.com/r/lexfridman
- Support on Patreon: https://www.patreon.com/lexfridman

The following is a conversation with Richard Crabe, founder of Numeri, which is a crowdsourced hedge fund, very much in the spirit of Wall Street Bets, 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, Trial Labs Machine Learning Company, Blinkist app that summarizes books, and Athletic Greens, all-in-one nutrition drink.

get a discount and to support this podcast.

As a side note, let me say that this whole set of events around GameStop and Wall Street Bets has been 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 in 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.

If you enjoy this podcast, subscribe on YouTube, review it on Apple Podcasts, follow on Spotify, support on Patreon, or connect with me on Twitter at Lex Friedman.

And now, here's my conversation with Richard Crabe.

From your perspective, can you summarize the important events around this amazing saga that we've been living through of Wall Street Bets, the subreddit and GameStop and in general, just what are your thoughts about it from a technical to the philosophical level?

Like when I was reading about it, I was like, this is the best.

And it's also connected with my company, which we can talk about.

But what I liked about it is I like decentralized coordination and looking at the mechanisms that these are Wall Street bets users use to hype each other up, to get excited, to prove that they bought the stock and they're holding.

And then also to see that how big of an impact that that decentralized coordination had.

Were you impressed by the distributed coordination, the collaboration amongst like, I don't know what the numbers are.

After all of this is over and done, it'd be interesting to see, like from a large scale distributed 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?

And 1 of the reasons is the lack of credibility.

To coordinate with someone, you need to make credible contracts or credible claims.

So if you have a username on our Wall Street bets, like some of them are like deep fucking value is 1 of them.

That's an actual username, by the way, we're talking about.

There's a website called Reddit and there's subreddits on it.

And a lot of people, mostly anonymous, I think for the most part, anonymous can create user accounts and then can then just talk on form like style boards.

If you don't know what Reddit is, check it out.

If you don't know what Reddit is, maybe go to the aww subreddit first, A-W-W with cute pictures of cats and dogs.

Yeah, that would be a good start to Reddit.

When you get into it more, go to our Wall Street bets.

So yeah, so there's these users, and there's no contracts, like you were saying.

But there are little things 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 that's also kind of like giving credibility to your next thing.

And then they are also putting up screenshots, like this, this is the, these are, here's the trades I've made, and here's a screenshot.

But still, it seems like if you've got a lot of karma and you've had a good performance 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.

So you kind of integrating all that information together yourself to see like, huh, there's something happening here.

And then you jump it onto this little boat of like behavior, like, we should buy the stock or sell the stock and then another person jumps on, another person jumps on.

a sudden you have just a huge number of people behaving in the same direction.

What was strange with this 1, it wasn't just let's all buy Tesla.

Let's let's all buy Tesla because that we've heard before.

So what they did with this, in this case, they're buying a stock that was bad.

And that's really weird because that's a little bit too galaxy brain for a decentralized community.

And the reason they liked it is because it had really, really high short interest.

It had been shorted more than its own float, I believe.

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.

And we should say that shorted means that these are a bunch of people, when you short a stock, you're betting on the, you're predicting that the stock is going to go down and then you will make money if it does.

It's really that if you are a hedge fund and you take a big short position in a company, there's a certain level at which you can't sustain holding that position.

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, 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.

So it's an interesting situation particularly because it's not zero-sum.

If you say let's all get together and make a bubble in watermelons, you buy a bunch of watermelons, the price goes up, it comes down again, it's a 0 sum game.

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 why it was such a clever thing for them to do.

A couple to the fact that shorting, I mean, maybe you can push back, but 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.

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 haters.

I know that there's efficient, you wanna have an economy efficient mechanism for punishing sort of overhyped, overvalued things.

That's what short-end gifts 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.

And you get to see that with Elon Musk and so on.

So this is like the man, so people like hedge funds that were shorting are like the sort of embodiment of the evil or just the bad guy, the overpowerful that's misusing their power, and here's the crowd, the people, they're standing up and rising up.

So it's not just that they were able to collaborate on Wall Street bets 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 just studying history, people can be manipulated by charismatic leaders.

And so like, just like Elon right now is like manipulating, encouraging people to buy Dogecoin or whatever, like there can be good charismatic leaders and there can be bad charismatic leaders.

It's a little bit scary how much power Subreddit can have to 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 awesomeness and the price of freedom.

It's 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?

Well, yeah, the cool thing is the Reddit people weren't doing anything exotic.

It was a creative trade, but it wasn't exotic.

Okay, maybe they bought some options too.

But it was the hedge fund that was doing the exotic thing.

It's hard to say, well, you know, we've got together and we've pulled all our money together.

And now there's a company out there that's worth more.

But it doesn't talk about, you know, the motivations, which is, and then we destroyed some hedge funds in the process.

Is there something to be said about the humor and the, I don't know, the edginess, sometimes viciousness of that subreddit.

I haven't looked at it too much, but it feels like people can be quite aggressive on there.

1 of the things that people have compared it to is the Occupy Wall Street, which is, let's say, some very sincere liberals, like 23 years old, whatever, and they go out with signs and they have some kind of case to make.

It's like a little bit more nihilistic, a little bit more YOLO, and therefore a little bit more scary.

Because who's scared of the Occupy Wall Street people with the signs?

I was scared of the Wall Street bats people.

Yeah, the anonymity is a bit terrifying and exciting.

I mean, yeah, I don't know what to do with it.

I've been following events in Russia, for example.

It's like there's a struggle between centralized power and the distributed.

I mean, that's the struggle of the history of human civilization, right?

But this on the internet, just that you can multiply people, like some of them don't have to be real, like you can probably create bots.

It starts getting me, me as a programmer, I start to think like, me as 1 person, how much chaos can I create by writing some bots?

And I'm sure I'm not the only 1 thinking that.

I'm sure there's hundreds, thousands of good developers out there listening to this, thinking the same thing.

And then as that develops further and further in the next decade or 2, what impact does that have on financial markets, on just destruction of reputations, or politics, the bickering of left and right political discourse, the dynamics of that being manipulated by, you know, people talk about like Russian bots or whatever, we're probably in a very early stage of that.

So do you have a sense that most of Wall Street bets folks are actually individual people?

That's the feeling I have is there's just individual, maybe young investors doing a little bit of an investment, but just on a large scale.

The reason I found out I've known about Wall Street Bets for a while, but the reason I found about GameStop was this.

Just I met somebody at a party who told me about it and he was like 21 years old and he's like, it's gonna go up 100% in the next 1 day.

This was probably, no, this was yeah, a few days ago.

Yeah, it was like maybe 2 weeks ago or something.

But it was just strange to me that there was someone telling me at a party how to trade stocks who was like 21 years old.

And yeah, he did make, he made, yeah, he made 140% in 1 day.

He's a little bit wealthier, and now he's gonna wait for the next thing.

And this decentralized entity is just gonna get bigger and bigger.

And they're gonna together search for the next thing.

So there's thousands of folks like him, and they're going to probably search for the next thing to attack.

People that have power in this world, that sit there with power right now in government, and in finance, in any kind of position, are probably a little bit scared right now.

And honestly that's probably a little bit good.

Yeah it certainly makes you think twice about shorting.

It certainly makes you think twice about putting a lot of money into a short.

Like these funds put a lot into 1 or 2 names.

And so it was very, very badly risk managed.

Do you think shorting is, can you speak at a high level just for your own as a person, is it good for the world?

I do think that there are 2 kinds of shorting.

Evil shorting is what Melvin Capital was doing.

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 trying to bring this company down.

And I don't think, in some cases, you go out to fraudulent companies, say, this company is a fraud.

They were just saying it's a bad company and we're going to bring it to the ground, bring it to its knees.

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.

I don't know any of them except for 1, because it was 1 of the meme stocks.

But we're shorting them not to make them go, we don't even want them to go down necessarily.

That doesn't sound a bit strange, I say that, but we just want them to to not go up as much as our longs.

So, by shorting 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, we didn't have market risk.

And so I think that's a good thing because that means we can short the oil companies and go long Tesla and make the future come forward faster.

So we talked about this incredible distributed system created by Wall Street bets.

And then there's a platform, which is Robinhood, which allows investors to efficiently, as far as you can correct me if I'm wrong, but there's those and there's others in this new MRI that allow you to make it accessible for people to invest.

But that said, Robinhood was in a centralized way, applied its power to restrict trading on the stocks that we're referring to.

Do you have a thought on actually like the things that happened?

I don't know how much you were paying attention to sort of the shadiness around the whole thing.

Well, I think I want to see the alternate history.

Like I want to see the counterfactual history of them not doing that.

How bad would it have gotten for hedge funds?

How much more damage could have been done if the momentum of these short squeezes could continue?

What happens when there are short squeezes, even if they're in a few stocks, They affect kind of all the other shorts too.

And suddenly brokers are saying things like, you need to put up more collateral.

It was 1 of these meme stocks, super bad company.

A meme stock is kind of a new term for these stocks that catch mimetic momentum on Reddit.

And so the meme stocks were GameStop, the biggest 1, GameStonk, as Elon calls it, AMC, and BlackBerry was 1, Nokia was 1.

So these are high short interest stocks as well.

Some people say, isn't it adorable that these people are investing money in these companies that are nostalgic?

You go into the AMC movie theater, it's like nostalgic.

It's like, no, it's not why they're doing it.

It's that they had a lot of short interest.

And so they were high chance of short squeeze.

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 have looked like?

Well, you wouldn't have needed very many more days of that kind of chaos to hurt hedge funds.

I think it's underrated how damaging it could have been.

Because when your shorts go up, your collateral requirements for them go up.

We have a prime broker that said to us, you need to put up, you know, like $40 per $100 of short exposure.

And then the next day they said, actually, you have to put up, you know, all of it, 100%.

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, if that happens, not only do you have to cover the short, which means you're buying the bad companies, you need to sell your good companies in order to cover the short.

So suddenly all the good companies, all the ones that the hedge funds like are coming down and all the ones that the hedge funds hate are going up in a cascading way.

So I believe that if you could have had a few more days of GameStop doubling, AMC doubling, you would have had more and more hedge fund deleveraging.

But so hedge funds, I mean, they get a lot of shit, but do you have a sense that they do some good for the world?

I mean, ultimately, so, okay, first of all, Wall Street Bets itself is a kind of distributed hedge fund.

I mean, if some of those were destroyed, would that be good for the world?

Or would there be coupled with the destroying the evil shorting, would there be just a lot of pain in terms of investment in good companies?

A thing I like to tell people if they hate hedge funds is, I don't think you want to rerun American economic history without hedge funds.

Because hedge funds are kind of like picking up.

And so if you love venture capitalists, They're investing in new technology, it's so good.

You have to also kind of like hedge funds because they're the reason venture capitalists exist because their companies can have a liquidity event when they go to the public markets.

So it's kind of essential that we have them.

I believe we could maybe get away with only having an AI hedge fund.

But we don't necessarily need these evil billions type hedge funds that make the media and try to kill companies, but we definitely need hedge funds.

Maybe from your perspective, because you run such an organization and 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, you know, and he also had a conversation with Elon Musk on Clubhouse, which I just signed up for.

It was a fascinating, 1 of the great journalistic performances of our time with Elon Musk.

How hilarious would it be if he gets a Pulitzer Prize?

And then his Wikipedia would be like, journalist and part-time entrepreneur.

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 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.

Like how much do you want to tell people about really what went down?

How much in private do you want to push back and say, no, fuck you to centralized power, whatever the phone calls you're getting, which I'm sure 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, what do you call it?

Like pressured to behave in certain kinds of ways from all kinds of directions.

Like what do you take from this whole situation?

I was very excited to see Vlad's response.

I mean, it was pretty cool to have him talk to Elon.

And 1 of the things that struck me in the first few seconds of Vlad speaking was, I was like, is Vlad like a boomer?

But here we are, he seemed like a 55-year-old man talking to a 20-year-old.

You can see why Citadel and him are buddies, right?

It's like, this is a nice, it's not a bad thing.

It's like he's got a respectable professional attitude.

Well, he also tried to do like a jokey thing.

Boomer, but like a 60-year-old CEO of Bank of America would try to make a joke for the kids.

But I think maybe that's also what I like about Elon's kind of influence on American business is like, he's super like anti the professional, like why, why say, why say, you know, a hundred words about nothing.

And so I liked how he was cutting in and saying, Vlad, what do you mean?

It's like the first principle of thinking.

The problem, of course, is, you know, for Elon, it's cost him, what is it, tens of millions of dollars, his tweeting like that.

But perhaps it's a worthy price to pay because ultimately there's something magical about just being real and honest and just going off the cuff and making mistakes and paying for them, but just being real.

See all Lex Fridman transcripts on Youtube

Richard Craib: WallStreetBets, Numerai, and the Future of Stock Trading | Lex Fridman Podcast #159