As an investor, I’d rather see a mediocre idea beautifully executed than an incredible idea poorly executed.
It’s astounding how often we read about some charismatic founder, developer who raises a small fortune for a start up business or real estate development project based on pie in the sky. Then, after spending and losing all their investors’ money, the Monday morning quarterbacks tell stories about how stupid the original business plan was.
Sometimes, a bad idea is rescued by luck, the advancement of technology, changing market conditions, or a pivot from the original stupid idea into something more viable.
I thought WeWork was a pretty good idea that could have been incredibly successful if it hadn’t been executed and run by an egomaniac who ran off with the cash.
I thought Theranos was an innovative concept way before its time, and it will probably be implemented by someone when technology and science catch up. Reminds me of Napster.
I thought it was a bad idea to build a skyscraper full of three and four bedroom apartments in a neighborhood where college grads were known to live.
And then I thought that Open Door buying houses at a discount from homeowners who need the cash is a good idea. Using an algorithm to determine the value of the property is dumb.
If you don’t subscribe to Matt Levine’s “Money Stuff,” you really should. He puts out a really high quality and timely daily financial newsletter. I’m not sure how he manages to produce such high quality content on a daily basis. I find it hard enough to put out Padkos once a week!
His newsletter on Thursday covered the psychology and rationale behind the latest meme stock resurgence.
OpenDoor is this year’s GameStop.
Matt’s newsletter quotes Steve Sosnick, Chief Strategist at Interactive Brokers, who said, “I’ve been seeing signs of a ‘flight to crap’ recently. The recent rally (of OpenDoor), which was largely powered in its initial phase by individual investors buying large cap stocks and major indices, has emboldened many to engage in more risky types of investing.”
Risky is an understatement. The stock was trading under $1 last week when it posted six consecutive sessions of double digit percentage gains. The shares are up 439% in a month. It wasn’t that we missed something. Open Door’s business is a decent and straightforward concept. Buy homes for a discount and then sell them at a higher price.
However, the most critical component is the strike price.
All you need to do to realize how bad AI is at determining value is to go on Zillow (which shuttered this part of its business before it hemorrhaged all its money). See how accurately it determines the value of your home.
If you gave 10 of the most experienced agents a property to price, 8 of them would accurately predict the sale price.
OpenDoor says “once you start the selling process with OpenDoor, you'll be assigned a dedicated Customer Experience Partner who can answer your questions throughout the transaction." They also say, "While Opendoor's process is largely online and automated, they understand the value of direct communication and offer access to live agents for personalized assistance.”
OpenDoor would be well served to hire top tier agents to perform their valuations. That’s the only way I can see them continue to ride this wave and prevent it from ending in a spectacular crash.
Let’s do this!
Shaun