Universal Basic Income and Inflation

Imagine if the government would decide that everybody would receive a monthly check of $4,000 as a Universal Basic Income. Now imagine that you are in need of a good plumber. How much do you think the plumber will charge:

  • Less than before UBI.
  • Same as before UBI.
  • More than before UBI.

If you think that the plumber will charge less than he did before UBI, you are probably overestimating the compassionate nature of plumbers. If you think a plumber would charge the same as before, you are assuming that plumber will disregard the effect of extra monthly $4,000 to their life.

My assumption would be that most plumbers are not plumbers of passion. Rather, they entered into plumbing because it paid well. The reason it pays well is because nobody aspires to be a plumber. But there is a price where the occupation of plumbing attracts enough of people to satisfy the need for plumbing.

My guess would be that many people would of alternative uses of their times when presented with Universal Basic Income. But the jobs aspire to leave behind would still need be done…just at another price.

The Joys of Compounding

On January 18, in 1963, a 32 year old Warren Buffett sent his annual letter to the limited partners of the Buffett Partnerships. The compound annul return for the limited partners that had been there from the start, five years ago, the return was 21.1%. The cumulative return for limited partners over the five years was 215.1%.

Gross of the management fees that he took as the general partner, Warren Buffett had compounded capital at 26% per year. In the letter, Buffett wanted to better educate his partners of the powers of compounding. In a section that he called “The Joy of Compounding”, he writes the following:

I have it from unreliable sources that the cost of the voyage Isabella originally underwrote for Columbus was approximately $30,000. This has been considered at least a moderately successful utilization of venture capital. Without attempting to evaluate the psychic income derived from finding a new hemisphere, it must be pointed out that even had squatter’s rights prevailed, the whole deal was not exactly another IBM. Figured very roughly, the $30,000 invested at 4% compounded annually would have amounted to something like $2,000,000,000,000 (that’s $2 trillion for those of you who are not government statisticians) by 1962. Historical apologists for the Indians of Manhattan may find refuge in similar calculations. Such fanciful geometric progressions illustrate the value of either living a long time, or compounding your money at a decent rate. I have nothing particularly helpful to say on the former point.

The following table indicates the compounded value of $100,000 at 5%, 10% and 15% for 10, 20 and 30 years. It is always startling to see how relatively small differences in rates add up to very significant sums over a period of years. That is why, even though we are shooting for more, we feel that a few percentage points advantage over the Dow is a very worthwhile achievement. It can mean a lot of dollars over a decade or two.

– Warren Buffett, 1963 Letter to Partners

Here’s the accompanying table:

Compounded Value of $100,000 at different rates and durations
Compounded Value of $100,000 at different rates and durations

All of Warren Buffett’s annual letters to partners are a treasure trove for any aspiring investor. You can find a compendium of the Buffett Partnership Letters over at CSInvesting.org.

How to Value a Brand?

The intriguing thing about brands is that they are mostly intangible. You generally won’t find the brand value of a company on its balance sheet. As an example, the $90 billion that Coca-Cola has spent on advertising in its history has no value that is shown on Coca-Cola’s balance sheet. Nonetheless, the brand value clearly is there. The market value of Coca-Cola’s common stock is ten times that of the stated book value of the equity. 

So how do we value a brand? The problem with a task like trying to value a brand is that there will always be some form of circular logic in this kind of exercise.

Is Coca-Cola such a strong business because it is built around such a strong brand, or is Coca-Cola such a strong brand because it is built around such a strong business? 

Where is the boundary where the value from the business model stops and value add from the brand begins? Is it even possible to separate those two things from each other? Brands are contextual. If you could buy the brand out of Coca-Cola, Inc and pivot it to sell Coca-Cola branded furniture, value would most definitely be destroyed. 

Brand Valuation Frameworks

As it turns out, ISO – the International Organization of Standards – has formulated a standard on Brand Valuation. You can even find an old version of the standard online.

Interbrand we the first company to get a certification for standard ISO 10668, the standard for Brand Valuation. Interbrand publishes an annual list of the most valuable brands in the world. You can read more about the Interbrand brand valuation methodology here.

Brand Valuation Resources

Something more to add? Let us know in the comments section!

Repugnant Markets | Alvin Roth on Trading Kidneys

A repugnant transaction is an economic term that describes an exchange between people that is generally perceived as morally or ethically wrong. These transactions fall outside of regular market mechanisms, hence the term repugnant markets. The repugnant nature of these transactions, cause these markets to be structurally inefficient. 

Examples of Repugnant Markets

  • Organ transplants
  • Child surrogacy 
  • Prostitution 
  • Recreational drugs

Whether a market is considered socially repugnant in not a binary definition. At the same time, what people consider to be a repugnant transaction can change over time and across cultures. Some transactions that are considered repugnant, are also illegal. Some are not.

Matching Markets

When you think about markets, the first examples that come to mind will be something like stock exchanges, farmers markets or auctions. In all these examples, the transaction is impersonal. If you want to buy a stock on the New Youk Stock Exchange, you simply need to place an order through a stockbroker. In fact, anybody can place a bid. 

Many markets are, however, personal. These markets are called matching markets. In order for a transaction to take place, a buyer and a seller need to be matched. A good example of this is the labour market. If you are in the labour market, you can’t simply choose a job. You need to match with an employer who is looking for someone who matches your skillset. 

Repugnant Transactions

In a matching market, price is not the only mechanism. For a matching market to be repugnant, it means that other people feel that it should not be allowed to engage in the desired transaction. 

Alvin Ross, the economist who coined the phrase, formulated the concept of repugnant transactions when studying kidney transplants. It is against the law almost anywhere in the world, to buy and sell kidneys for transplantation. Yet there is a black market for kidneys, which means that there are instances where individuals are willing to transact in kidneys, while people, in general, feel that it is immoral to do so. 

Alvin Roth on Repugnant Markets and Forbidden Transactions

In the following lecture, Nobel laureate Alvin E. Roth will investigate the nature of and reasons for repugnance with its implications for the design of markets. Why is it forbidden to sell and buy organs? Why is the exchange of kidneys that leads to many successful transplants allowed in some countries such as the US, but not in others like Germany? Which markets or transactions we allow, affects the choices that people have?

Watch the lecture and learn more:

Also on How to Value Stuff

10 Ways to Profit by being Less Logical than Anybody Else

Here at How to Value Stuff, we are all great admirers of Rory Sutherland. Rory is the head Ogilvy Advertising – founded by David Ogilvy, another man we greatly admire. David wrote a legendary book on marketing and sales, called Ogilvy on Advertising – and one of the most influential advertising professionals in the world today.

Rory has a fascinating view of how we perceive the value of the products and services we enjoy. In 2019, Rory published a book called Alchemy: The Surprising Power of Ideas That Don’t Make Sense, which was a follow up on a book he published the year before, Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life.

Here are 10 rules you can adopt which will help you profit by being less logical than everybody else:

1. The Opposite of a Good Idea can be another Good Idea

Nobody can blame you for getting at a single right answer regardless of the materials you used to get there. Conventional logic uses the idea of a single right answer. This is mostly needed where your job is in the line and you need to make everything right.

When it comes to driving at a single right answer, no subjectivity is involved in decision making and what you decide is what you deem right.

2. Don’t Design for Average

Solving a problem with an average person in mind is very difficult. Some models in conventional logic require you to solve a problem for people in aggregate. This can make problems very difficult to solve.

Do not limit yourself to the average person and focus on the fringes. That way, it is easy to find things that will be adopted by extreme consumers.  They can then be ploughed back in the mainstream.

3. It Doesn’t Pay to be Logical if Everybody Else is being Logical

Being logical in business will get you to the same place just like everybody else. In business strategy, it does not pay to be logical because being logical will get you to the same place where your competitors are going. In business, you need to be differentiating yourself away from your competitors.

Find out what your competitors are logically wrong about. If you find out what is wrong with their model, you are in a position to exploit it. Adopt contrarian thinking.

4. Our Attention affects Our Experience

The nature of our attention affects the nature of our experience. Quality is relative. The perception of quality is determined by the difference between expectations and experience. It is more difficult to change how a person experiences something than the expectation of that experience.

Rory gives an example of one of the best hotels he has stayed in. The hotel had previously been a prison or a police station. Everything from the bed and bathroom to the TV and wall hangings was very spartan nature.

Under most circumstances, you normally would have experienced this as a lack of quality. But the hotel was in East Berlin and the experience came across as authentic East Berlin. It fit the circumstances. It met what you would have expected from an authentic East Berlin hotel.

5. If there were a Logical Answer We would have found it Already

If a problem becomes persistent even after discussing it with every person who can relate to it, it means you are giving it a logical explanation. There is a solution somewhere to be found through conventional linear rationality approach.

Exposing everything to logic and the problem persists, it indicates that logic is not the answer to that problem. Gather some courage and test less rational solutions. Context is a marketing superweapon.

6. The problem with Logic is it Kills off Magic

Logic and magic cannot coexist. There is no magic where logic is involved. The rules of logic demand that there can be no magic.

Logic requires that you change your product instead of improving the perception of the product in order to enhance the customer experience. This confines you into doing exclusively objective things because you think that people perceive the world objectively.

7. A Good Guess which stands up to Empirical Observation is still Science

You should not let methodological purity restrict your capability of coming up with multiple solutions. It is good to allow solutions that come in randomly rather than being restricted to explainable solutions. The latter will hold you captive and will monopolize your progress.

8. Test Counterintuitive Things because Nobody Else will

Since you do not want to put your source of livelihood on the line, create a space in your business where you can test things that do not make sense. This will be an advantage to win over your competitor because your experiment will land you in a lucrative business idea that will make you outdo your competitors.

9. Don’t Solve Problems using only Rationality

Solving problems using only rationality is like playing golf using only one club. Using rationality as the only way of solving a problem will get your solution based on a very narrow path.

Solving problems by using only rationality will generate solutions that restrict themselves to a very narrow definition of human motivation and how they think, act and decide.

10. Dare to be Trivial

Sometimes big problems do not require huge intervention. On the contrary, a small thing can have an enormous effect. You do not have to do things in the correct order simply because it is the way they should be done. Small changes, such as alternating the order of options or changing relative scales, can yield an order of magnitude in results.

 

 

This is the biggest mistake value investors make

Value Investing is seductively easy. Summarized into one sentence, Value Investing is the art of picking stocks that are undervalued, a.k.a. buying a dollar for 50 cents.

Tempting, right?

The big problem – paraphrasing what Johan Cruyff said about football – Value Investing is a simple concept, but it is extremely hard to invest with simplicity.

How Value Investors Buy Books

Consider the following analogy:

Put yourself in the shoes of a Value Investor in a book store. Having a natural inclination to buy stuff that is undervalued, you will automatically be drawn to the table with a big sign saying:

  • Books 50-80% OFF! 

…and therein lies the problem.

Buying a book is a bet with an asymmetric outcome. The downside is that you will buy a book and it might turn out to be a waste of your time, plus the $10 to $30 it cost to purchase it. The upside, however, is close to infinite. A good book can fundamentally alter your life.

Coffee consumption is another good example. If you could only drink one cup of coffee a day, you would probably not drink the first cup of joe available to you. You would be more selective. You might even be willing to pay more for the right one.

Mistakes of Omission

Most of the books on the discount table are crap. They are there for a reason.

The Value Investor, focused on the table of discounted books, might end up finding a book that is good enough to be worth the purchase.

At the same time, his attention is turned away from the books that can truly alter his life.

https://youtube.com/watch?v=GtfYRY3rYVY%3Ffeature%3Dplayer_embedded

Do you disagree? Let us know in the comments below!

Investing in Crypto from a Portfolio Perspective

The appeal of cryptocurrencies and digital tokens is for many the possibility of a home run. But betting on one outcome will make your outcome binary. You are either right or you are wrong. In an investing subject that has such high uncertainty of outcome, as blockchain and cryptocurrencies undoubtedly have, trying to determine who the most likely winner is, might not be the optimal investment strategy.

An investor in the blockchain space, even if that investor would be 100% convinced that distributed ledgers will disrupt the finance industry, will face three major problems:

  1. We don’t know who the winners will be
  2. We don’t know what the winner will be
  3. The last mover advantage

We don’t know who the winners will be

Industries tend to consolidate over time. This has been as true with banking and auto manufacturing as it has been true with breweries and paint manufacturing. Online, the power laws of industry consolidation have been even stronger. In the online world, the winner takes it all. The network effects of digital products such as search engines and social networks are so strong that they tend to create natural monopolies. 

There have been thousands of cryptocurrencies and altcoins created so far in the relatively short history of blockchain. If the network effects of cryptocurrencies are anything like in industries that the internet brought us, most of these currencies are destined to die.

We don’t know what the winners will be

One of the biggest allures of blockchain disruption is that distributed ledgers will significantly alter the way humans organize themselves and their endeavours. Some will even go so far as to say that the concept of the company as a way for people to organize their efforts will become obsolete. 

Yet, even though the formation of Bitcoin and other cryptos, such as Ravencoin, have been without the ownership and organization structure of a company, most organizations that are developing products and services on blockchain technology are formed through a corporation. 

Some are a combination of both. An example of this is the combination of the XRP cryptocurrency by the company Ripple. Ripple does not own or control XRP, but it owns a significant amount of XRP which it received when the company facilitated the creation of the XRP cryptocurrency. 

So, where will the value capture be? Will it be on a cryptocurrency level or on a company level? Is it better to have exposure to XRP or Ripple? Currently, this is extremely hard to tell. 

Last Mover Advantage

Bear in mind that Google was not the first search engine. Neither Chrome nor Explorer was the first internet browser and Windows was not the first operating system. Facebook was not the first social network. 

In the words of Peter Thiel, “you don’t want to be the first mover into a market, you want to be the last mover.” It is possible that none of the cryptocurrencies and none of the biggest blockchain-focused innovators currently out there are the last movers in the space. Maybe we are yet to see the equivalent of Microsoft, Google and Facebook of crypto and blockchain yet. 

Portfolio Approach

In an essay called Diversification and the Active Manager, Horizon Kinetics’ Murray Stahl and Steven Bregman bring up a thought exercise whereby an asset manager starts out with a diversified portfolio that includes one overperforming stock and simply holds it over a long period of time.

They take Intel and Microsoft as examples:

“From October 1987 to December 1999, the stock appreciated about 173x. Thus, if a 3% position in 1987 were held in a portfolio and not traded away, it would have become a dominant portfolio position by 1999. In truth, the position would have become so disproportionately large that no active manager would have been permitted to maintain it.  

In fact, Intel would be a much better example. Between October 1987 and December 1999, Intel shares appreciated approximately 2,680x. Obviously, a 3% position in 1987 would, as a practical matter, become the entire portfolio by December 1999, irrespective of what performance the other portfolio elements accomplished.  

If one contemplates these facts, the implications can be interesting. It should be self-evident that any portfolio manager who simply held Microsoft and Intel shares would have dramatically outperformed the S&P 500. Again, of course, this would not have been permissible. Nevertheless, in hindsight, this would have been the correct action.”

Building a diversified blockchain portfolio

Aside from basically buying a basket of cryptocurrencies, an investor would also like to have exposure to companies that are building blockchain-related products and services or investing in such projects.

Currently, the number of public companies that have that exposure is limited and many often simply seem fraudulent once you look under the hood. There are however a few stocks that are worth considering to gain exposure to blockchain and cryptocurrencies:

  • Galaxy Digital Holdings (aim to become a merchant bank in crypto and blockchain)
  • Overstock (through its subsidiaries tZero and Medici Ventures) 
  • Hut 8 (cryptocurrency mining) 
  • FRMO Corp (shareholder in Digital Currency Group and a number of mining ventures)

More Thoughts on Crypto

Want to collect interest on your crypto? Sign up for a Blockfi account with this link and receive a $10 bonus in Bitcoin when you fund your account.

How to find a business exit broker

So you have decided to sell your small business or company. The very first thing that crosses through the mind of most people (and rightfully so) is the question: how can I maximize the value of my exit? The key here is getting the right broker for the job. 

The task of finding the right partner to help you sell your business is no easy. There are countless examples of owners that ending up choosing the wrong broker or having a misaligned incentive structure with their broker. As a result, they fail to get the right buyer or fail to close a sale. The repercussions of choosing the wrong broker can be drastic.

However, if you choose the right intermediary for your business exit, there is a possibility of obtaining your exit goals. But how do you get to choose the right broker? Don’t panic because we have got you covered and in this article we are going to give some tips that you should apply when choosing a business exit broker. To start with, don’t try to find an exit broker on google, you might end up regretting after making huge losses. Follow the following tips and you can be sure of getting the right broker.

Look for attributes of a superstar

You just don’t hire a broker without looking for his or her attributes. A good broker that is not going to bring losses should be characterized by the following features.

Specialized experience

Experience is not just experience. When it comes to selling your business. A broker might have been in the game for more than 20 years and still not be the right choice for you. You need to go for a broker who is experienced in your line of your business. For example if you deal with electronics and you choose a broker who has been dealing with real estate for all his life, you might end up making losses no matter how talented he is. Having experience in your industry is vital.

The broker should also have some experience selling businesses and companies in your geographical market as well as within your price range. If the broker does not have this knowledge, it is very possible that his pricing and marketing efforts might fall short of your sales goals.

A verified track record 

The broker you are about to hire should be able to provide you with some reference of customers he or she have served before and they were satisfied with his efforts. If he is not willing to share this kind of information, it might be a red flag that he is not as good as he claims to be.

But when the broker gladly provides you with a list of customers who were more than satisfied to work with him it is a step towards the right direction. Follow up a few clients who were served and confirm the claims that he is a superstar. If the ones who you contact seem to agree that he is a star, then ask about his weaknesses and see if his qualities are enough to help you meet your objectives.

Connections and Networks

If a broker claims that he will be able to take your business from listing to closing alone without needing any help from anyone that is a bomb waiting to explode to your business. Excellent brokers usually have established connections with able lawyers, accountants as well as other local professionals.

Even if you are going to use your own lawyer, it is still important to confirm that the broker has good relationships with lawyers and other professionals in your locality. This will help you understand if the lawyer has been able to gain respect from them and if he has, then most certainly he is as good as he says.

Truthfulness and Trust

The most common barrier when it comes to selling your business is the pricing. Not many brokers are honest about the real worth of the business. Most of the brokers usually tell the clients what they want to hear. This can result to dragging during the sale of the business.

But a broker who is good and knows what he is doing will tell you up front the value of your business and other sensitive details of your business even though that’s not you might be wanting to hear. If the broker is that truthful and he has all the above qualities, there is a very high chance that he is going to make you profits.

Finding a Broker You can Trust

Now that you are equipped with the traits that you should look for, it is important to understand where to start your search.

Local Referrals

There is no better way of finding an excellent broker than from the local referrals. Do some research and find out whom is doing business listing in your area and then verify his or her qualifications discreetly using some of your industry contacts. Get all the information you need about him or her before considering to hire.

Legal and Financial Advice

There is a very high chance that your lawyer or accountant knows one or two brokers that are very good at their jobs. Keep them in the loop and ask them to help you identify the best broker for the job.

Online Directories

Many online directories are not very reliable but since you already know how to identify a good broker when you see one, you can look for some suggestions from online and assess a few of them before hiring one.

Chambers of Commerce

Most of the chamber of commerce and economic development offices usually possess up to date information about most of the local professional brokers included and they may be able to help you find an excellent broker. Just to protect your confidentiality, frame your questions in a general manner.

Cryptocurrency Mining has to be Profitable

In essence, a cryptocurrency is nothing but a transaction system, a means of exchange. You can argue (as you can with all currencies) that it is also a store of value, but the only reason to store value is the intent to exchange it for something else at a later date. 

Every transaction system has a settlement system. For all digital currencies, the settlement cannot be physical. The main problem with the previous versions of digital currencies has always been that digital things can be copied. Cryptocurrencies solved this with distributed ledger and the mining process. 

The Mining Process is the Settlement System

 In a Proof of Work cryptocurrency, transactions are facilitated through the mining process. So, in the case of proof of work cryptos, such as Bitcoin and Dash, there has to be a mining process. For there to be a mining process, the mining has to be profitable over the long term. 

Think of it this way: If I can buy a Bitcoin for less than the cost of mining a Bitcoin, why would I mine Bitcoin? But if the miners would stop mining Bitcoin and rather buy Bitcoin, there would be no Bitcoin. 

But That’s not how it Works…

The Proof of Work system is beautiful in that way because it adapts over time. If the price of Cryptocurrency falls below the cost of mining, fewer people will mine, which means that the total Hashrate will drop. When the Hashrate drops, the difficulty rate drops, which means that the likelihood of winning the block reward goes up.  

This mechanism means that over the long run, a functioning cryptocurrency should provide proper incentives to the miners, that is mining yields. 

The Dash Example

Dash is a Proof of Work cryptocurrency. The Dash development community has been very focused on payments and on building applications for Dash to become an alternative option to payments. Although Dash seems to be gaining traction on many levels, the price of the currency has fallen drastically over the last 6 months. 

For Dash miners, this means that mining Dash has become unprofitable. In April 2019, one could buy a Dash mining contract from Genesis Mining that would have a current yield (current daily mining output/cost of a day of mining) of close to 100%. 

Currently, you can buy a 12 month Dash mining contract that will cost you $0.27 a day per 30,000 mh/s. The output, however, based on the current Dash to USD exchange rate will be about $0.19. 

So as a potential Dash investor, what does this mean? One of two things needs to happen. Either Dash miners need to leave the mining pool to make mining more profitable or the value of Dash needs to go up and above the cost of mining. 

More Thoughts on Crypto

Want to collect interest on your crypto? Sign up for a Blockfi account with this link and receive a $10 bonus in Bitcoin when you fund your account.

Diversification | What it really means

According to Wikipedia, “diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk.”

Investopedia has a slightly different take, saying that “[d]iversification is a risk management strategy that mixes a wide variety of investments within a portfolio.”

To many, diversification means investing in the market in general. You can do that by investing in a broad market index, such as an ETF that tracks the S&P500 index. There are also the Russel indexes. Basically, if you own the market, you get the market return.

The Contrarian View on Diversification

But diversity does not necessarily have to mean more. The goal of diversification is not to get the market return but to reduce exposure to a particular event.

What you are trying to achieve by being diversified is to make sure not everything you are investing in moves in tandem. By doing so, you embed optionality into your portfolio.

If you accept this reasoning, you will also agree that a portfolio of 5 stocks can be seen as being diversified if those 5 positions are not affected by the same factors.

Think about it this way: Which of the two portfolios is the safer investment strategy?

  • Portfolio A: A basket of common stock of the 20 biggest financial institutions in the U.S.
  • Portfolio B: A basket of 5 stocks each in a separate industry.