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Ophir Gottlieb (CEO & Co-founder) — Ophir Gottlieb is the CEO & Co-founder of Capital Market Laboratories (CML). CML is a member of the famed Thomson First Call roster, but our purpose is to provide institutional research to all investors and break the information monopoly held by the top .1% You can follow his stock research, called CML Pro, here: http://bit.ly/TopPIcks You can use the option-backtester here: http://bit.ly/Option_Trading Ophir contributes to Yahoo! Finance and MarketWatch and generates nearly one and a half million readers a month. He was rated the 14th best finance follow on all of Twitter. Ophir Gottlieb is inventor of the Forensic Alpha Model (FAM) and a co-inventor of Accounting and Governance Risk Model (AGR), both now owned commercially by MSCI. Mr. Gottlieb’s methodological approach taken in creating FAM was endorsed by the head of artificial intelligence for the state of Germany as a novel and extraordinary application of advanced machine learning and quantitative finance. FAM and AGR are used by asset managers worldwide with over $1 trillion of assets under management. The FAM model has made Mr. Gottlieb one of the most recognized names in all of quantitative finance. Mr Gottlieb’s mathematics, measure theory and machine learning background stems from his graduate work in mathematics and measure theory at Stanford University and his time as an option market maker on the NYSE and CBOE exchange floors. He has been cited by various financial media including Reuters, Bloomberg, Wall St. Journal, Dow Jones Newswire and through re-publications in Barron’s, Forbes, SF Chronicle, Chicago Tribune and Miami Herald and is often seen on financial television.

Facebook Inc (FB) Trust Is Now an Issue

Mark Zuckerberg

Preface

By now it’s commonly known and widely discussed – people with the intent to persuade or dissuade American voters in the latest Presidential election did so (or at least tried) using Facebook Inc’s (NASDAQ:FB) massive power and reach. But, what has received little ink is the potential crisis this could bring about for the company – and it has nothing to do with politics.

On the Money

I discussed this topic with CBC News’ famed anchor Peter Armstrong. Here is that interview, and then the dossier below gets much more granular.

Story

A director of marketing for a firm that spends millions of dollars on Facebook once told me:

In short, (Facebook is) most powerful direct response advertising network this generation has ever seen.

Facebook will unleash a machine learning algorithm (almost like bloodhounds with a scent) to identify (your market) and only serve ads to those individuals.

This is true. Facebook collects more data at a more granular level than we have ever seen in the ad business. In fact, it’s this granularity that has been exploited for malicious ads as well. ProPublica blew the roof off the secret with its story about Facebook and bad actors.

The broader point in the expose was that people list so much detail in their Facebook profiles, and reveal even more in their posts and actions on the platform, that anything, even a specific kind of racist, can be found and targeted.

The Washington Post, just yesterday, revealed more of the same, but this time it was politically charged (our emphasis added):

In addition to Custom Audiences, Russian operatives used other Facebook tools to target groups by demographics, geography, gender and interests, according to the people familiar with the investigation. The Custom Audiences tool differs because it allows advertisers to feed into Facebook’s systems a specific list of users they want to target.

The conclusions of investigators fit those of several independent researchers, who say that the Russian disinformation campaign exploited the core advertising and tracking technologies that Silicon Valley has honed over a decade to serve corporate America.

It’s Not Just Scale

The argument that Facebook is so successful due to scale alone fails a sniff test. The company is roughly 6.5x larger in monthly average users than Twitter, but the market caps, as of this writing, are about $500 billion for Facebook versus $13 billion for Twitter. That’s roughly 38 times as large with just 6.5x the users.

So, what Facebook has created is in fact, as the market above noted, the most powerful direct response advertising network this generation has ever seen.

The Problem

As the United States Congress does its own investigation, and publications like ProPublica continue with their exposes, Facebook has reacted. On September 15th, 2017, BusinessInsider noted:

(Facebook) said it was removing self-reported targeting fields until it could ensure that targeting wouldn’t be used for discriminatory purposes.

This is the beginning of an examination of the granularity of data that Facebook not only holds but exposes for advertisers to benefit. And while removing racist categories is hardly a chink in the Facebook armor, a systematic destruction of its unbelievably detailed profile building is possibly, if not likely, already underway.

Mark Zuckerberg’s US Year

Just as the news of the election meddling took pace, Mark Zuckerberg set out on his goal for 2017 – to visit all 50 U.S. states. While the media jumped on an opportunity to note that this could be the beginnings of a political career, the point was missed.

Zuckerberg is ahead of this story – he’s ahead of all of us. This “US year” was (is) an attempt to get out in front of the inevitable stories that would begin to poke holes in the true reasons behind Facebook’s unimaginable success.

As these stories break, so does the trust of Facebook users. But it goes even further.

Echo Chamber

Another benefit Facebook reaps from its magical machine learning algorithms (entirely dependent on data) is that it creates an echo chamber for its users.

It’s no surprise that people would, generally, rather discuss topics with people that share the same opinions. There are lots of names for it, perhaps the most common is confirmation bias, but we don’t need a title — it just means that people engage more with the community (read: Facebook) as they find opinions similar to their own.

It’s this very reality that turned a reported $100,000 in ads into a reach of 10 million people. Yes, the ads were targeted at an unprecedented level, but then they were shared within echo chambers that are created by the very data that Facebook relies on to sell ads.

What This Means

The worst-case scenario here seems semi-probable – Facebook will be forced to hide some of its prized data about each person – that very data that allows advertisers to find the small group of people that want to buy a pink and silver bicycle with yellow tassels, white handles and a blue elephant license plate, or more nefariously, the people that want to kill others based on race.

Without the data, that is, without the special and unique data that Facebook can offer advertisers that other platforms (read Twitter, Snapchat), Facebook is not worth 38 times Twitter even though it is at 6.5 times scale.

Further, without that data, the echo chambers break and makes Facebook less appealing. It’s not fun to disagree. Smaller echo chambers, or even broken ones, mean less bang for the buck for advertisers as well.

Add user trust issues, and all of a sudden people will start to realize that every little “quiz” game they see on Facebook that users fill out to figure out which house in Harry Potter they would be, or which celebrity they would be, is just a ruse. These are not fun quiz games, they are data collection facilities designed for one reason – take your data, store it, sell it, and use it for advertising.

Without the data advantage, the echo chamber advantage and with user trust issues, Facebook is just a place with 2 billion monthly active users. That is not a $500 billion company – or, at the very least, we have reason to believe that it might not be.

Conclusion

It’s easy to say the sky is falling. It’s also headline-grabbing to do so. Further, it’s quite unlikely. But for Facebook, Mark Zuckerberg sees that possibility. He is visiting the United States and yes, it is political. But he isn’t running for office, he’s running to save his company’s reputation.

Oh, and by the way, he is scheduled to sell upwards of $15 billion of stock in the next 18 months.

 

Disclosure: The author owns put options in Facebook, which means if the stock goes down a lot, he would profit.

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