“What is a cynic? A man who knows the price of everything and the value of nothing.” – Oscar Wilde
“Price is what you pay. Value is what you get.” – Warren Buffett
“A value is valuable when the value of value is valuable to oneself.” – Dayananda Saraswati
Shifting paradigms
I just completed a real estate transaction and am now the proud owner of another piece of land. And you know what is so cool? It is adjacent to where Snoop Dogg, the famous American musician, and rapper, bought his mansion. I marvel at the chance to waft the smell of my famous slow-cooked BBQ ribs over to Snoop Dogg and entice him to come over and join my party. I have been eying this lot for more than two years, but I could never convince myself to put the monies down. My discontent grew as the asking price almost doubled in a few months, and I told myself how crazy this was to let it go. I convinced myself prices would fall again, a reverse to the mean sort of thing.
Yes, that thought was wrong, initiated by my brain neurons and synapses, cultivated by years of buying and selling real estate, making the same decisions repeatedly. My decision followed a well-worn path of low resistance in my brain. Now, will you believe me if I tell you that after Snoop Dogg bought his mansion, the land prices next to it went ballistic? Yes, also the land I was eying. I was beating myself up. Man, what a procrastinator I am; what a fool.
Finally, after many sleepless nights, I could not take it anymore. My brain was on fire, and my desire was too. I was going to miss out on my dream piece because of rising prices. I can disregard waiting for the price reversal if Snoop Dogg can do it, right? Boy, by the time the ink dried on my real estate contract, the land price I paid was 800% more than when I started looking two years ago. Oh well, I clearly need help!
I am now sitting in the office of Brian, an elastic brain neurologist. I am trying a new program called “Elasticize your brain, new ways of thinking.” It will retrain my brain synapses to work differently with hopefully better outcomes. The old-school way of thinking did not do it, right Dogg? Snoop Dogg paid USD 480,000 for his mansion, and I spent… probably too much. Luckily, I could pay for the land with Ether cryptos which had gained quite a lot. Crazy world, right? Brian says it will take months and many sessions to get my mind to change.
The land I bought is located in the Sandbox, a Metaverse where everything you own, buy, or trade is an NFT, a Non-Fundable Token. Whatever, it has something to do with blockchain, and it works. All I know is they promised not to make more land available, so I must wait for you to join and also buy land, so my assets rise. Simple as that. They say prices will explode even further. Wait, what? You have already owned land in the Sandbox since inception? I knew it!
Shifting paradigms part II
So yes, a lot is going on in the virtual world, with big companies like Facebook, Microsoft, Alibaba, and Tencent making very significant moves to capture more of this paradigm shift estimated to be worth USD 8 Trillion. We better pay attention: it might be intangible and virtual, but real hard dollars are being forked out in the billions to create virtual platforms to live, work, and own assets. Get your avatar dressed up to impress because this is a real thing.
In the real world, significant shifts are taking place as well, and we also better pay attention to those. A major shift taking place is the economic growth in Asia, especially in China. We see fierce competition playing out globally between the USA and China, both by the governments and some of its largest domestic companies. It makes a lot of sense to keep an open mind towards both investment universes and be conscious of the more significant shifts.
Significant shifts are also occurring in our real lives, fusing the virtual and the real worlds, becoming part of our daily routines. The acceleration of Work-From-Home, fintech, health-tech, gene therapy, biotech, electrical vehicles, robotics, enterprise efficiency software, metaverse platforms, and artificial intelligence will profoundly impact our lives and the financial prospects of almost every company worldwide. It seems evident to me we are moving to a blended world of virtuality and reality with cryptocurrencies to facilitate transactions.
More and more companies have only intangible assets instead of “old school” tangible assets, like machines, tools, etc., which significantly impact net earnings due to the different accounting rules treating the two. How do we capture the value of these paradigm shifts, and what is it worth?
What is anything worth?
Traditionally and still foremost, the most essential value parameter remains cash flow. All well-versed investors try to guestimate the future cash flows of investments and access the discounted sum of those to get to a present value of that investment. This is an exercise with a fat tail. In other words, the longer you predict cash flows into the future, the higher the chance that there will be significant deviations to its outcome. How far we look into the future, and the discount rate, have a substantial impact on the result. Better get both somewhat right than precisely wrong.
But what about assets like paintings, cryptos, virtual land, or gold that do not produce cashflows? How do we value those assets?
For that, we must finish our program with the elastic brain neurologist and train ourselves to see more valuation options than cash flows. It has much to do with having a long-term vision, taking outside risks, having a view that is often far apart from the consensus, understanding psychology and herd mentality. We are naturally primed as copy machines. This starts, of course, when we are born, continues throughout our lives, and has a considerable influence on what we desire, consume, and how and what we invest in.
Every asset that is rare, scarce, desired, or has a promising future to the beholder, has an embedded option value. The trick is to get that option value somewhat right. A rare painting by itself is not worth an exceptional amount of money. However, a rare painting desired by everyone is worth almost an infinite amount.
So, it seems that an option value of an asset has a lot to do with the potential amount of people wanting to own the same thing and its scarcity. For desirable assets that do not generate cash, this creates a fertile ground for quick price increases once everybody wants the same, creating bubbles and the occasional crash. Currently, virtual land and cryptos may be good examples. In the past, we witnessed this with the Tulip mania in the1630’s in the Netherlands.
Following human nature, prices of non-cash producing assets and young companies tend to be very volatile. Some assets will have staying power, and some will rise to astronomic heights before crashing to zero, operating much like the value of an option in the stock market. Option values follow closely and multiply our collective human emotion shift between greed and desire and fear and loss.
It is also essential to access the Total Addressable Market (TAM), which usually is defined as an estimate of the total potential buyers or users. Pink Ferraris are not for everyone, so it makes sense to study the likely demand and follow the trend of mimicking buyers constantly to make a better estimate. You see, it all seems so simple, but it is not so easy to pick winners. Ultimately the value is a moving target. It is always preferable to have cash flow generating assets powering your valuation over time. Power laws will do the rest, and we will be amazed at the outcome.
To make an educated guess as an informed investor, regardless of non-fundamentals or fundamentals, we need to be realists, visionaries, optimists, curious, and amalgamators of multiple disciplines. There is no way you can come to a precise worth. Your estimated value is only what you hope to get.
When do I Buy or Sell?
There are many moments when we ask ourselves what actions we should take, especially when we can see daily/hourly prices go up or down. When prices go up, we usually get the urge to join the herd and buy. When prices crash, we panic and want to sell. In these extreme situations, we have limited resources in our brains to help us. It is called a scarcity mindset: we feel we need to act now in fear of missing out. This urgency clouds our decision-making and is often driven by very primal instincts. To reach better decisions, it is best to slow down, talk to yourself as if you were talking to a good friend, take the emotions out of the equation. We should only buy the best opportunities we understand and align this with the risk we think we are taking. We should only sell our high convictions investments when there is a material change in our investment thesis or a better opportunity available.
Long-term high conviction investments make it much easier to resist short-term decisions and ignore short-term price falls. Amazon’s share price fell three times more than 50%, and during the dot.com crash dropped 90%. Obviously, it would have been an opportunity lost to have sold it.
It pays to fight our biases like overconfidence, confirmation, and recency biases and keep our emotions in check. Be patient and invest for the long run. Read a lot, confirm your processes and be optimistic. Ultimately, the value is in the eye of the beholder, and all you can hope for is that there will be a lot of beholders with the same eyes.
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