The Power of "I don't Know"; OpenDoor Got SPAC'd

Buy the rumor, sell the news

The Power of “I don’t know”

Consider the following contrived dialogue:

“What do you think of this stock?”

“I don’t know.”

“Yeah but you have such great insight on all these other stocks.”

“That’s because I’ve looked at them before.”

“So what do you think of the stock that I just asked you about?”

“I don’t know.”

“Yeah, but….”

This kind of dialogue happens, a lot, to people who feel no compunction about admitting that they don’t know something. I always find it curious that, when asking another person a question, the asker gets upset or confused when the responder simply says: “I don’t know.” No one knows everything, and it’s ok not to have an opinion on something about which you’re ill-informed or uninformed. The world would be a happier place, I think, if more people simply admitted when they don’t know the answer to something.

OpenDoor Gets SPAC’d

Back in 2017, someone on Quora asked me my opinion about OpenDoor. I answered, in part:

To directly answer the question asked: yes, a company whose inventory is illiquid and financed with debt is at risk if the economy takes a turn for the worse. But then most companies are at risk if the economy enters a downturn. The unique risk here is that in down economies, houses, never the most liquid of assets, become even more illiquid (houses are harder to sell in down economies). Further, holding houses on your balance sheet incurs various expenses such as maintenance, taxes, insurance, etc. which can drain valuable cash from the company.

I had not heard of OpenDoor prior to having been asked the question, but I tried to reason from first principles about how finance and accounting work. I still don’t really understand the business, and I am likely missing something. I have no insight into its financial statements, though perhaps I will dedicate a future post to a breakdown of their financials, once they are made public.

This morning I learned that OpenDoor is going public through a reverse merger with a SPAC. SPACs, as I’ve written about elsewhere, are publicly-traded companies formed with the express intent of acquiring a non-public company. This allows the non-public company to access the public markets without going through the trials of an IPO and its associated roadshow. Bill Gurley has written at length about the appeal of SPACs, here.

Gurley prefers SPACs as a route to the public markets over traditional IPOs and direct listings because he believes that the former two methods (IPOs or direct listings) leave too much money on the table for the founders and their investors, and are too expensive, to boot.

My view about SPACs is pretty straightforward: traditional SPACs allowed SPAC sponsors to dump their shares upon acquisition of a company, which meant that SPAC sponsors had no incentive to ensure that the company the SPAC acquired was a high quality one. Thus, traditional SPACs suffered from reputational stink. If SPACs have solved for this misalignment of incentives through new structures (as Bill Ackman’s Pershing Square Tontine Holdings is claimed to do), then SPACs may well be a viable path for high quality privately held companies looking to go public.