{"id":15213,"date":"2020-08-24T18:24:41","date_gmt":"2020-08-24T18:24:41","guid":{"rendered":"http:\/\/mediashower.com\/blog\/?p=15213"},"modified":"2020-12-08T19:39:37","modified_gmt":"2020-12-08T19:39:37","slug":"the-golden-rule-of-value-investing","status":"publish","type":"post","link":"https:\/\/www.mediashower.com\/blog\/the-golden-rule-of-value-investing\/","title":{"rendered":"The Golden Rule of Value Investing"},"content":{"rendered":"<p><a href=\"https:\/\/www.bitcoinmarketjournal.com\/author\/matig\/\">Mati Greenspan<\/a> and I were talking recently about basic investing principles. He was marveling that people are still buying Tesla stock at $2,000 a share. \u201cPeople don\u2019t understand valuation,\u201d he said.<\/p>\n<p>\u201cThey don\u2019t understand the <strong>value<\/strong> of what they\u2019re buying,\u201d I agreed.<\/p>\n<p>\u201cThey think Tesla is the same thing as SpaceX,&#8221; he continued. &#8220;They don\u2019t understand that Elon Musk is going to blast off to Mars, and he\u2019s not going to bring Tesla with him.\u201d<\/p>\n<p>I thought this was a funny way of explaining valuation. Our conversation got me thinking about a larger principle that I\u2019ll call the Golden Rule of Investing: <strong>invest in companies and blockchains that add real value to the world<\/strong>.<\/p>\n<p>This is similar to the concept of <a href=\"https:\/\/www.investopedia.com\/terms\/v\/valueinvesting.asp\">value investing<\/a>, the famous investment strategy that Warren Buffett has used to amass his fortune. But before you dive into value investing, the Golden Rule is a simple \u201crule of thumb\u201d to help you quickly identify a few possible <em>good<\/em> investments while throwing out a boatload of potentially <em>bad<\/em> investments.<\/p>\n<p>That rule of thumb is to ask, <strong>&#8220;Is this company or blockchain adding real value to the world?&#8221;<\/strong><\/p>\n<p>Value is defined as \u201cthe importance, worth, or usefulness of something.\u201d So we might rephrase this as, <strong>&#8220;Does this company or blockchain add importance, worth, or usefulness to the world?&#8221;<\/strong><\/p>\n<p>Some examples will help.<\/p>\n<h2>The Health and Wealth Portfolio<\/h2>\n<p>Back at the beginning of the pandemic, we put together the <a href=\"https:\/\/www.bitcoinmarketjournal.com\/the-coronavirus-stock-portfolio\/\">Health and Wealth Portfolio<\/a>, a collection of four public stocks that we predicted would add real value during the CoronaCrisis: Amazon (AMZN), Clorox (CLX), Netflix (NFLX), and Zoom (ZM).<\/p>\n<p>In five months, those stocks are up a whopping 94% &#8212; your money has just about <a href=\"https:\/\/www.bitcoinmarketjournal.com\/double-your-money-investing-in-an-economic-downturn\/\">doubled<\/a>.<\/p>\n<p><center><br \/>\n<img loading=\"lazy\" class=\"aligncenter size-full wp-image-129131\" src=\"https:\/\/www.bitcoinmarketjournal.com\/wp-content\/uploads\/2020\/08\/health-wealth.png\" alt=\"Health and wealth portfolio\" width=\"916\" height=\"606\" \/><\/center>The premise was simple: during a pandemic, which companies make stuff that people need? Which companies, in other words, <em>add value?<\/em><\/p>\n<ul>\n<li>Disinfectants and cleaning agents would be valuable (CLX).<\/li>\n<li>Entertainment that people could enjoy at home would be valuable (NFLX).<\/li>\n<li>Videoconferencing would be valuable (ZM).<\/li>\n<li>And companies that could deliver stuff \u2013 not to mention delivering data \u2013 would be valuable (AMZN).<\/li>\n<\/ul>\n<p><em>Of course these companies add value<\/em>, you might say. <em>Congratulations on your doctorate in Obviousness<\/em>. To which I will ask: <em>did you invest in them back in March?<\/em> (Full disclosure: I did.)<\/p>\n<h2>Does Bitcoin Add Value?<\/h2>\n<p>Maybe you saw that videoconferencing would be a thing, but you didn\u2019t know <em>which <\/em>videoconferencing solution would win out. A good indicator of value is when you have personally received value from the product.<\/p>\n<p>I had personal experience with all four companies. I knew Zoom was the best videoconferencing platform because I had tried them all. I knew Netflix was a great streaming service, with a river of new content and a slick user interface. I knew Clorox had that distinctive smell that tells you the place is clean. And I knew Amazon delivered the goods (literally).<\/p>\n<p><strong>When you try a product yourself that is genuinely useful or worthwhile, that\u2019s a great place to begin investigating an investment<\/strong>. Note I said \u201cbegin investigating.\u201d Here is where we do our traditional <a href=\"https:\/\/www.investopedia.com\/articles\/fundamental-analysis\/09\/five-must-have-metrics-value-investors.asp\">value investing<\/a> analysis, which is basically asking, <em>Is this company likely to be worth more in the future than it&#8217;s worth today?<\/em><\/p>\n<p>In other words, is the stock on sale?<\/p>\n<p>Blockchains are different &#8212; they\u2019re not publicly traded companies \u2013 but the principle is the same. <em>Is this digital asset or cryptocurrency on sale?<\/em> Will this blockchain project be worth more in the future than it is today?<\/p>\n<p>When we apply this question to bitcoin, I\u2019m really not sure it makes the grade. When it began, the cryptocurrency certainly had something of value to offer the world: a decentralized digital currency, but also a <em>model <\/em>for a new form of exchanging value. That has incredible, world-changing value.<\/p>\n<p>But now we get the point. Blockchain projects and digital currencies are abundant. What else is bitcoin good for today? What value, in its current state, is it adding to the world? You can&#8217;t really spend it. It&#8217;s too volatile to use as a store of value. The answer, to me, is not obvious. Today, I would probably pass on bitcoin as an investment.<\/p>\n<p>But Ethereum is another story. To me, there\u2019s no question that Ethereum is adding value.<\/p>\n<p><center><br \/>\n<img loading=\"lazy\" class=\"aligncenter wp-image-129132\" src=\"https:\/\/www.bitcoinmarketjournal.com\/wp-content\/uploads\/2020\/08\/infinite-machine-300x300.png\" alt=\"Infinite machine book cover\" width=\"400\" height=\"400\" \/><\/center><\/p>\n<h2>Does Ethereum Add Value?<\/h2>\n<p>We recently ran a <a href=\"https:\/\/www.meetup.com\/Blockchain-Investors-Supergroup\/\">virtual Meetup<\/a> where I interviewed Camila Russo, author of the new book <a href=\"https:\/\/www.amazon.com\/Infinite-Machine-Crypto-hackers-Building-Internet\/dp\/0062886142\">The Infinite Machine<\/a>, which is a fast-paced page-turner about the history of Ethereum. Many of our attendees wanted to know what she thought about \u201cEthereum killers,\u201d or competing blockchain platforms that might displace Ethereum.<\/p>\n<p>Camila pointed out that while competing technologies might be better, Ethereum has a tremendous head start in terms of users and developers, which builds the \u201cnetwork effects\u201d which make Ethereum so hard to beat. She pointed out that technologies that overcome Ethereum\u2019s limitations \u2013 that make it easier to use \u2013 are probably better bets.<\/p>\n<p>Ethereum, in other words, is adding real value to the world. Witness the explosive growth of <a href=\"https:\/\/thedefiant.substack.com\/about\">DeFi<\/a>, or decentralized finance, new applications that are largely being built on Ethereum. Or remember the <a href=\"https:\/\/www.audible.com\/pd\/Blockchain-for-Everyone-Audiobook\/1508282137\">ICO boom of 2017<\/a>, where most of those projects were built on Ethereum.<\/p>\n<p>Even if an <em>individual project<\/em> built on Ethereum is not adding value, Ethereum <em>as a platform<\/em> is adding huge value \u2013 in the same way that an individual YouTube video might be terrible, but YouTube as a platform is unquestionably valuable.<\/p>\n<p>When you buy ETH, you are \u2013 in a sense \u2013 investing in the value of Ethereum. It\u2019s not a publicly-traded company, but the principle is the same. You are confidently proclaiming that in the future, Ethereum will be worth more than it is today. It adds value.<\/p>\n<p><em>Does Ethereum add value? <\/em>At this point, my answer would be a resounding \u201cYes.\u201d<\/p>\n<h2>Does DeFi Add Value?<\/h2>\n<p>The hottest thing in blockchain right now is DeFi. As we\u2019ve covered in previous weeks, this renewed interest in crypto is one of the main things driving up the price of bitcoin. Here\u2019s a chart showing how much value is \u201clocked,&#8221; or borrowed against, inside these smart contracts:<\/p>\n<p>&nbsp;<\/p>\n<div id=\"attachment_129133\" style=\"width: 710px\" class=\"wp-caption aligncenter\"><img aria-describedby=\"caption-attachment-129133\" loading=\"lazy\" class=\"wp-image-129133\" src=\"https:\/\/www.bitcoinmarketjournal.com\/wp-content\/uploads\/2020\/08\/total-value-locked.png\" alt=\"Total value in DeFi chart.\" width=\"700\" height=\"346\" \/><p id=\"caption-attachment-129133\" class=\"wp-caption-text\">Courtesy <a href=\"https:\/\/defipulse.com\/\">DeFi Pulse <\/a><\/p><\/div>\n<p>The companies and projects that make up this DeFi ecosystem are like jargon salads. There\u2019s <a href=\"https:\/\/compound.finance\/\">Compound<\/a>, an \u201calgorithmic, autonomous interest rate protocol built for developers, to unlock a universe of open financial applications.\u201d<\/p>\n<p>There\u2019s <a href=\"https:\/\/uniswap.org\/\">Uniswap<\/a>, a \u201cfully decentralized protocol for automated liquidity provision on Ethereum.\u201d Then there\u2019s <a href=\"https:\/\/yearn.finance\/\">Yearn<\/a>, a \u201cprofit switching lender to optimize lending yields,\u201d whose YFI token just exceeded the price of bitcoin (over <a href=\"https:\/\/news.bitcoin.com\/yearn-finance-token-jumps-245-in-5-days-defi-token-yfi-worth-more-than-a-single-bitcoin\/\">$15,000 per YFI<\/a>).<\/p>\n<p>It\u2019s as if we went down the bitcoin rabbit hole, only to find that within that rabbit hole was <em>another<\/em> rabbit hole, even bigger and weirder than the first. We went into the Matrix, only to discover a <em>second Matrix<\/em>.<\/p>\n<p>When we see the crazy amount of money and activity flying around on these new DeFi applications, it can be tempting to fall into the FOMO, or be frozen by the FUD.<\/p>\n<p>To become wise investors, our twin enemies \u2013 the Fear of Missing Out, and the Fear Uncertainty and Doubt \u2013 must be conquered.<\/p>\n<p>This simple question \u2013 <em>are these projects adding value?<\/em> \u2013 can be a great way of cutting through FOMO and FUD.<\/p>\n<p>In other words, don\u2019t try to make money by \u201clocking up\u201d (or borrowing against) your crypto to buy more crypto. That\u2019s a house of cards, a castle in the air, a teetering Jenga tower. Eventually it comes crashing down.<\/p>\n<p>Instead, try asking yourself: <em>what value are these projects bringing to the world? <\/em>In other words, even if they\u2019re not companies, <em>think<\/em> of them like companies.<\/p>\n<p>What is the product or service that Yearn is delivering, and will it be the long-term leader in this space? Do you really think that Yearn is worth $15,000 per token \u2013 when even the wildly hyped Tesla stock is only trading at $2,000 per share?<\/p>\n<p>No doubt it\u2019s difficult to compare the value of a \u201cdecentralized lending application\u201d to something like, say, Clorox bleach. It may not be easy to arrive at a fair price for something that\u2019s fast-moving and cutting-edge.<\/p>\n<p>But we can at least ask that initial question: is there really something of value here? And does it seem like we\u2019re at least in the right universe of price?<\/p>\n<p>Which brings us back to our original point: is Tesla overvalued?<\/p>\n<h2>Does Tesla Add Value?<\/h2>\n<p>Certainly it provides a valuable product: <a href=\"https:\/\/www.nextbigfuture.com\/2020\/04\/eight-tesla-products-spell-sexy-cars.html\">Tesla cars are sexy<\/a>, <a href=\"https:\/\/insideevs.com\/features\/403607\/consumer-reports-tesla-highest-satisfaction-rate\/\">customers love them<\/a>, and they get high <a href=\"https:\/\/www.consumerreports.org\/car-reliability-owner-satisfaction\/tesla-model-3-model-s-regain-consumer-reports-recommendation\/\">consumer rankings<\/a>. Moreover, they are leading the future of transportation, making EVs not only practical but <em>cool<\/em>. That adds tremendous value to the auto industry, and to the planet.<\/p>\n<p>A company or a blockchain is so much more than a single charismatic founder. It is a <em>system<\/em> for producing value. In the case of Tesla, it\u2019s not just the cars, it\u2019s the <em>networks<\/em>: all the dealers, suppliers, and charging stations. It\u2019s also the <em>data<\/em>: all those cars automatically wirelessly sending and receiving updates, like an enormous mobile network of \u201claptops on wheels.\u201d (Thank you <a href=\"https:\/\/www.stitcher.com\/podcast\/puck-soup\/the-nerdist?bvstate=pg:2\/ct:r\">Chris Hardwick<\/a>.)<\/p>\n<p>Here is the market capitalization (or total value) of some of the top motor companies, compared with Tesla:<\/p>\n<p><center><br \/>\n<img loading=\"lazy\" class=\"aligncenter wp-image-129134\" src=\"https:\/\/www.bitcoinmarketjournal.com\/wp-content\/uploads\/2020\/08\/value.png\" alt=\"Value\" width=\"701\" height=\"463\" \/><\/center>Even the venerable Ford has a market cap of just $26 billion. Investors are so excited about Tesla, they are pricing it at 15 times more than Ford. Meanwhile, if someone offered me a Ford car for $30,000 or a Tesla car for $450,000 (15 times the price), I\u2019d probably say that \u201cThey\u2019re both still cars.\u201d<\/p>\n<p>In other words, Tesla is creating tremendous value. But does it add that much value? Tesla is probably not a stock on sale.<\/p>\n<p>To sum up, here\u2019s how I\u2019d look at a few sample investments today using the Golden Rule of Investing:<\/p>\n<ul>\n<li>Bitcoin: where\u2019s the value?<\/li>\n<li>Ethereum: probably undervalued<\/li>\n<li>Tesla: probably overvalued<\/li>\n<li>DeFi: too soon to tell<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><strong>Investing in companies and blockchains that add real value to the world<\/strong> is the Golden Rule of Investing.<\/p>\n<p>It\u2019s not just a feel-good saying. It\u2019s a mighty metal detector for digging up buried treasure.<\/p>\n<p>It\u2019s a razor-sharp machete for slashing through trash. It\u2019s a formidable weapon against FUD and FOMO.<\/p>\n<p>The Golden Rule can be a powerful principle for finding gold. Use it well.<\/p>\n<p><em>P.S. To get even more value, sign up for our free weekly <\/em><a href=\"https:\/\/www.bitcoinmarketjournal.com\/join\/\" target=\"_blank\" rel=\"noopener noreferrer\"><em>blockchain newsletter<\/em><\/a><em>.<\/em><em><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Mati Greenspan and I were talking recently about basic investing principles. He was marveling that people are still buying Tesla stock at $2,000 a share. \u201cPeople don\u2019t understand valuation,\u201d he said. \u201cThey don\u2019t understand the value of what they\u2019re buying,\u201d I agreed. \u201cThey think Tesla is the same thing as SpaceX,&#8221; he continued. &#8220;They don\u2019t<span>&#8230;  <a class=\"read-more\" href=\"https:\/\/www.mediashower.com\/blog\/the-golden-rule-of-value-investing\/\">Read More&#8230;<\/a><\/span><\/p>\n","protected":false},"author":2,"featured_media":15214,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[459],"tags":[],"_links":{"self":[{"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/posts\/15213"}],"collection":[{"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/comments?post=15213"}],"version-history":[{"count":5,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/posts\/15213\/revisions"}],"predecessor-version":[{"id":15608,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/posts\/15213\/revisions\/15608"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/media\/15214"}],"wp:attachment":[{"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/media?parent=15213"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/categories?post=15213"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/tags?post=15213"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}