Category: Investing

As I already described in InvestBasics #1: Holy Grail of Investing it clearly matters to have high conviction in the positions you take.

The first way to get conviction of course is to know as much as possible about the project you are interested in investing in. But no matter how much you research or time you dedicate to a project there will still be unknowns left that only time will answer.

I learned that it was much more important how I dealt with unknown unknowns, rather than the things I knew.

Ray Dalio

Thus to get even higher conviction, it can be helpful to filter your watchlist by their underlying technical / growth assumptions. The fewer assumptions are needed for the project to be successful the better.

Finally, the best bets are, of course, once that will not go against if you are wrong, but move massively in your favour if your thesis is right.

What do I mean by that?

Imagine an gold rush in historic times:

1) You can either search for gold yourself
Or
2) You can sell Jeans, Shovels, and Picks

In both cases, you are profiting from the gold rush directly or indirectly. However, if the gold rush turns out to be fake you still have revenue in option 2), just not as much optionality. While you are probably broke in option 1).

Simple Assumptions with profound change

I think the following assumptions are hard to argue against. This list can also be a good starting point if you are looking to start something in this space.

Number of Investment Vehicles Rising

The Web1.0 revolution made it easy to share information worldwide. The Web3.0 revolution makes it easy to create new Investment Vehicles. Thus it is an easy assumption to make that the number of investment vehicles will rise substantially over time. Whether this will be ERC-20, ERC-777 or any other standard on a new blockchain.

Implications:

• Increased need of research, advisory, analytics
• Increased need of trading / market making
• Need for active portfolio management
• Need for derivates on base assets
• Need for margin-lending

Number of Smart Contracts Rising

With more assets becoming available on “digital native rails” automated ways to process them become essential.

Implications:

• Increased need of Smart Contract Developers
• Increased need for Smart Contract Auditing
• Increased need of Eduction around Smart Contracts
• Need of NoCode Smart Contract Editor?

Fraud Detection & Compliance

With any system that doesn’t let you reverse transactions, fraud will always be present. You can already see current crypto exchanges becoming more regulated and users moving to decentralized exchanges.

It’s a simple assumption to bet on more regulatory needs, fraud detection as well as tools that are trying to counter that and maintaining users’ privacy.

Summary

It is only very rare that you encounter a project which only underlying assumption is any of the thesis above. Most early crypto projects are a bet on the founders more than anything. Nevertheless, I hope this high-level description helps you to think about your positions.

If there are any thesis I missed, let me know and I might write up a V2 of this article: [email protected]

RiskRatchet

I just coined that term

This is a pattern I recognized from reading books of successful investors as well as reviewing quite a lot of market data. However, I have not found anyone naming this recurring pattern.

Risk Classes
Within any given theme, be it

• Gold
• Bitcoin / DLT
• Tech
• Cannabis

there is always a spectrum of risk classes to choose from when deciding to play a theme. Let’s take the example of Gold:

Risk Class	Example
Physical Gold	XAUUSD
Gold Royalty & Streaming	Franco Nevada
Producer / M&A (Large Tier)	Barrick Gold
Producer (Small, MidTier)	B2Gold
Development Company	Equinox Gold
Exploration Company	too many 😉

You can simply buy gold if your thesis is that it will perform well over the next years. However, buying a Gold Royalty & Streaming Stock will offer a better return because of their operational leverage to the gold price. And so the different risk classes continue. The highest leverage within a Gold Bull Market is actually achieved by buying companies that have not yet build a mine but are currently exploring to find gold. That leverage, however, works in both ways: If gold does not perform as well the exploration company might be insolvent while you could still be holding your ounces of physical gold.

Shifting Risk Classes
The interesting point is during a bull market investors’ confidence rises and they are more open to shift their position to a higher risk class. Utilizing this shift can help to increase your overall returns as well as risk and volatility adjusted returns.

The Gold Bull Market from 1999 – 2011 could have been played best by buying

• Physical Gold for the first few years
• Shifting to Producers and Developers
• And finally allocating funds to warrants of exploration Companies for the last few years

RiskRatchet in Crypto
The same applies to Web3.0 Assets. Currently, Bitcoin is still the dominant asset. Ethereum closely follows, but during a bull market like 2017 most altcoins outperform. Asymmetric but irrational returns happen at the peak of the bull run in the highest risk class of “ICO”s or future equivalents.

RiskRatchet
I started to refer to this phenomenon as “RiskRatchet”, because just like with a hardware ratchet, once the market shifts to the next risk class it gets adopted as “the new thing” and cannot move back. Of course, once the peak is reached the whole process reverses at double the speed. Just like once you release the tension of the ratchet.

Narrative

In a time of near-zero or negative interest rates, narratives of potential growth receive a lot of bids. Often these occur within a common theme or catalyst that could kickstart that growth.

„Narrative economics, the study of the viral spread of popular narratives that affect economic behavior, can improve our ability to anticipate and prepare for economic events“

Robert J. Shiller. „Narrative Economics.“

He defines an economic narrative as a contagious story that has the potential to change how people make economic decisions.

It is often difficult to quantify a narrative, however, one can often access the direction of an emerging narrative, present narrative, or deflating narrative. I would argue narrative is a leading indicator for adoption and thus could be categories by the same schema as adoption.

Following this from an investment perspective, being early in emerging narratives that play out, in the end, is all you should worry about.

Following up on my recent post about Holy Grail of Investing I want to list values, ratios, and indicators to look at to help you with the decision making of single positions or sector themes.

Individual Position Selection

Fundamental Factors:

Earnings & Valuation RiskReward
It is especially important to compare the Status Quo in Revenue, Earnings, and current expectation versus possible future scenarios. How much of the future scenarios are already priced in?

• Price To Earnings (PE) Ratio
• Price to Earnings Growth (PEG) Ratio
• Price to Book (RB) Ratio
• Prices to Sales (PS) Ratio
• Past Earnings Growth

NAV – Net Asset Value
Ressource Intensive Stocks, or just Commodity Storage businesses sometimes trade at premium or discount to NAV. Just knowing the historical context of how that premium or discount develops gives you great insights into unique buying opportunities.

Margin of Safety
The Earlier you are in a narrative can also be a margin of safety. Simply communicating future scenarios that are not at all priced in can lead to substantial gains and be a margin of safety for holding longer.

Backtested Scores
Furthermore, there are some other scores that can be useful :

• Piotroski F-Score
• Beneish M-Score
• Sloan Ratio
• Altman Z-Score

You can read more about them in the book from Charlie Tian, the founder of gurufocus.

Technical Factors

Liquidity
Global Liquidity is currently playing a large role in how assets are priced. Liquidity shocks like in December 2018 lead to everyone simultaneously decreasing their nominal exposure, which results in a market with a lot of sellers and only very few buyers.

Valuation Ranges
Most things in nature move within a range. Whatever the factors behind might be: I found it useful over the years to look at Valuation Ranges in long-term historic charts to get perspective.

• Valuation Range of P/B
• Valuation Range of Price/FCF
• Valuation Range of ROA

I can’t go into detail about every indicator, but it should give you a decent headstart into researching ones you didn’t know before.

There are only a few overall principles that help you to make good decisions in investing. In the InvestBasics series, I will outline my current curation of factors to learn and watch.

Portfolio Building

Scrap all the traditional ideas of 60/40, a diversified ETF Portfolio. Once you decide to put in the time to build experience for potential outperformance, this is the core principle you will follow:

High conviction, High Risk/Reward ideas, and themes that are ideally uncorrelated to each other. 

Adding any other position that does not fit this definition will just dilute your portfolio and future returns.

„It’s Crazy to Put Money in Your Twentieth Choice Rather Than Your First Choice“

Charlie Tian „Invest Like a Guru.“

I will let Ray Dalio explain the rest…

Seems simple, but actually there are only a few fund Investors worldwide that try to execute this principle to its full potential.

One of the people or funds to follow is: John Burbank of Passport Capital

I’m just a guy from a small village in Germany that is chasing Innovations.

I was enthusiastic about a lot of “innovative” things like Drones, 3D Printing, SaaS… All of them seem innovative and are in fact in some ways. However, I think the biggest opportunity set for Innovations is going to emerge from the space I will be reviewing and writing about on this blog.

This blog is about my learnings, my journey, and adventures chasing, investing in, and hopefully creating some innovations.

My writing style is like my investment style: I want to be right on the big decisions and want to have fun on the way. Isn’t that what life is about?

Anyways, …

I like adventures. In Nature. In Startups. In Investing. And in Crypto / Web3.0.

Here I will write about the latter three but occasionally mix in some holiday or nature adventures.

So, why this blog?

I’ve never really committed to writing. So this is the first try. I will be researching quite a lot of investment ideas and crypto projects and will be sharing my learnings on the way.

However, please don’t simply copy any of the things I will be writing about without your own research first. I only want to be a curator of relevant information not necessarily the source of new one.

If you find this content helpful and find anything that supports or counters the theses I describe in this blog, I like to hear from you: [email protected].

So this blog is my way of staying in contact with people about the projects and topics I’m involved in and crowdsourcing parts of my research.