January 2023: Investing Review of 2022
January 2023: Investing Review of 2022
Talmud, Fun and Growth
This isn’t advice on how to invest your money or someone else’s money. I’m sharing my experience. A lot - if not all - of these investments have a risk of losing value or going to zero.
Overview of funds
I split funds into three buckets:
Talmud.
My goal is steady growth and not losing money.
The strategy is one third stocks, one third real estate and one third reserves. I originally read about this strategy in Gigerenzer’s book Risk Savvy. Then I found out the strategy is in the Talmud and realised “Talmud” is a shorter name for the strategy!
I try to avoid index funds. My original reasoning is that too much money in index funds is bad for the overall market. There’s now an additional reason - given I’m now in Ireland. In owning an index fund, I’m forced to realise a capital gain for taxes every seven years (which one could argue is justified as a tax on the negative externality of passive investing… although that probably wasn’t the law’s intention).
Avoiding index funds probably goes against my own self interest. I lose the benefit of strong diversification and am subject to my own stupidity in picking the wrong investment managers or stocks. The original piece about my Talmud approach is here:
Fun.
It’s a small stash for geeky projects, mostly crypto.
Growth
This bucket of funds is a way for me to learn about public and private stocks. I am doing stock picking, which is very hard and likely to lose money. I spent a reasonable amount of time in 2022 thinking about this - maybe 200 hours. One of my goals in 2023 is to spend a less time, maybe 100 hours max, so that I can focus my time instead building Trelis.
Talmud in 2022:
I was talking to a friend last night who was saying he always holds a good portion of cash. That meant a loss of 7-10% in 2022 because of inflation. Still, it was his best investment! That sums up 2022!
My Talmud strategy ended fairly flat for the year in dollar terms, apart from Bitcoin and Ether holdings. Here’s a quick run-down.
Stocks
At the start of 2022 I only had Berkshire Hathaway stock. Berkshire stock has been about flat for 2022, compared to the S&P500 dropping almost 20%.
The problems with just owning Berkshire are that a) Warren Buffett will die some day and b) just owning one stock makes me vulnerable to fraud or catastrophe hitting that specific company.
In 2022 I swapped a small amount of Berkshire stock for VTI - a world stock index. Maybe I’ll continue to sell off Berkshire stock slowly, but I’m leaning towards keeping it.
Stocks did ok for me in 2022 because Berkshire did better than the S&P.
Real Estate
The real estate I held was all in Store Capital, a real estate investment trust specialising in mid-size commercial property leases in the US. I first heard about the company because Warren Buffett was an investor.
Store Capital was bought out by a private company in 2022, this means that I am forced to sell my shares. The buy-out was at a premium to the market price. So, even though most real estate went down in price in 2022, I ended up doing ok because of the premium that was paid for Store Capital.
I’m unhappy Store Capital was bought out because the company seemed to be one of the few specialising in that part of the real estate market, and was growing dividends steadily. No doubt that’s why private investors wanted to buy it out. The original founder CEO had stepped down about a year ago, although another co-founder had stopped in. Maybe with founders moving on and the market being down, that drove the reason to sell for a premium. In real estate investment trusts, founders don’t usually own much of the business because shares are constantly being sold to fund new real estate investments - which dilutes out any founders. Store Capital was unique in that it had reasonably high founder ownership. Now - absent any better ideas - I’ll probably have to buy an index fund of Real Estate Investment Trusts…
Real estate did ok for me in 2022. Factoring in dividends, Store Capital went down only about 3%. And, due to portfolio rebalancing, I had bought low during the year, so I ended up profitable on real estate for the year.
Reserves
This is the category that did the worst for me, but it wasn’t all that bad. Most of my reserves were short term US government bonds and earned a little interest. My other holdings did badly:
Gold went down 7%.
Bitcoin and Ether went down by 66%+. These had previously gone up a lot so this fall reversed previous gains. I don’t do rebalancing on these. I’m just holding.
Euro weakened by 6% versus the dollar.
I got lucky in 2022 because of how things panned out with Berkshire and Store Capital. My Talmud strategy is doing a good job of protecting me from my own stupidity. The most vulnerable parts of my portfolio were probably the concentration of risk in Store capital and Berkshire. In 2023, my Store Capital holdings will probably move to something more diversified. I’ve diversified Berkshire a little bit and will continue to think about how best to do that further.
Fun in 2022:
At the start of the year, the main projects I had were:
Helium - a communications network. I didn’t buy these tokens but earned them for running a small antenna device. I was one of the first 5,000 units on the network. Today there are nearly 1M. I got lucky and earned a lot of incentives for being one of the first antenna operators. In 2022, Helium got a lot of flak because the network usage is still low, while the market cap of the token reached billions of dollars. I had previously taken a profit on some tokens and sold the rest during 2022. I’m not sure if that was a good decision. There are use cases I can see for cheap low bandwidth communications between electronic devices. So, while Helium was clearly massively overvalued, perhaps it may prove some worth and I should have held on.
Reflexer - This is the governance token of a free-floating stablecoin called RAI that is overcollateralised by Ether. One can think of the project as an automated rules-based approach for a central bank to adjust interest rates. The stablecoin has weathered a few bear markets now and is still working as designed. I sold my tokens in 2022 because usage is poor and I don’t see a clear path to widespread adoption of the RAI stablecoin. I hope I’m wrong because I like the project’s goal of improving decision-making in interest rates/inflation.
Celo - this is the governance token of a payment network designed for trading carbon offsets and other eco type tokens (yes, I know that’s vague, it still isn’t clear to me what they could be). I like the mission and the people behind Celo a lot. I sold my tokens in 2022 though because a lot of the goals seem difficult to achieve in practise (for example, voluntary carbon credits have big issues with double issuance and fraud).
At the end of 2022, my main fun holdings are:
Stargate - this is a protocol that allows tokens to be swapped across different blockchains. I picked up these tokens in an auction (I made a podcast about it here). I got rewarded and lucky for getting involved early in the auction). Some of the tokens I bought are still vesting, which means that I can’t sell them until later in 2023. The protocol works well and I’ve used it for moving funds between blockchains. However, I think the project could be more transparent about their code and having it verified. Other inter-protocol approaches (perhaps like IBC from Cosmos) might win out too. [Edit: Jan 30th 2023: It seems issues around contract verification and transparency are coming true. More from James Prestwich here.]
Atom. Cosmos provides a toolkit for anyone to spin up their own blockchain. While the Ethereum philosophy is to build one large empire that relies on Ether, the Cosmos philosophy is to have a network of independently controlled blockchains. Atom is the governance token of Cosmos Hub (yes, it’s confusing, Cosmos is the toolkit to build blockchains, and Cosmos Hub is one such blockchain… Osmosis and dydx are other ones.) It’s ironic to think that Atom could accrue a lot of economic value when the ecosystem is premised on independent blockchains, not an empire ruled by Cosmos Hub. Still, I think Ethan Buchman, one of the founders of Cosmos is a good thinker. He’s got a set of views that are a bit like David Graeber. As an example of Buchman’s novelty, his company operates as a worker’s cooperative rather than as a corporation.
Liquity is a token that earns a share of fees from the Liquity stablecoin protocol. LUSD is a stablecoin that floats between $1 and $1.10 in value and is overcollateralised by Ether (you can read more about currencies and overcollateralisation here, with an example of the Danish Krone). The Liquity smart contracts are well audited and the project doesn’t suffer from issues with a lot of crypto projects like having bad governance (there is no governance, the code is set in stone) or ponzi scheme tokenomics (the Liquity token simply earns a share of the borrow and redemption fees from the protocol).
Urbit is both an identity (e.g. think phone number) and an operating system (think Linux or Windows). The idea is that each person owns their own server and their own data. It’s about bringing data control back to users. The project is at an early “nerd” stage and the products aren’t very usable. Still, with mounds of data gathering, it’s one of the few projects (perhaps with Umbrel) that is thinking differently about restoring data control to users (rather than focusing solely on solving the problem by regulation, which I think is part of the solution but an incomplete solution). Urbit identities can be bought and sold, a bit like websites. They are limited in quantity, which, if adoption grows, would render the identities valuable, again like websites.
Overall for 2022, on the fun front, my holdings were down about 2X in dollar terms, and up about 2X when measured versus the price of Ether, which is my performance benchmark. The only reason I didn’t do much worse is because of the Stargate auction going well.
Growth
The growth bucket is split into two: Public Stocks and Private Stocks. (After 202, perhaps I will rename this bucket “shrinkage”.)
Public Stocks
My approach in picking public stocks has been to focus on founder-led companies that are cash-flow positive. My reason for picking founder-led companies is their ability to make stronger course corrections when the company is in trouble, and their ability - via trust or control - to make longer term investing decisions. A counter-argument is that markets should price-in these effects already. In fact, one might argue that - in late 2021 - founder led companies were overvalued by the market, to the detriment of my picks!
My second criterion of companies being cashflow positive (I look holistically at the last 4-8 quarters of operation) is to avoid picking companies that go bankrupt. When the market sours, it’s hard for companies to raise capital. This makes companies that aren’t cashflow positive vulnerable to failure.
The stocks I bought but then sold because the company’s cashflow deteriorated were:
Coinbase - crypto exchange
Twilio - text and email marketing platform
Nubank - Brazilian neobank
Shopify - eCommerce platform
Snapchat - messaging app
At the end of 2022, I’m just holding four stocks:
Meta - social media business and metaverse black-hole for money
Spotify - music platform
Airbnb - accommodation platform
Wise - UK neobank (formerly TransferWise)
In short, 2022 was carnage for my public stock picks. The S&P500 was down 20%, the NASDAQ index of tech stocks was down 33%, and I managed to do even worse - down 50% on this portion of my portfolio!
Private Stocks
I split my private stocks category into two: a) things Ronan picks, b) things Sahil picks. Obviously, this is a lot of concentrated risk in my own abilities and those of Sahil.
Private Stocks that Sahil Picks
Sahil Lavignia is an entrepreneur who also runs an early stage investing fund on Angel List. I did one of his online courses and then invested in his fund, which involves making a quarterly contribution. [If you’re an entrepreneur looking for investment and I know you, I can refer you to Sahil for consideration. Read more here.]
The nice things about Sahil’s fund are that a) he does a lot of deals per quarter, so you get good diversification, b) he is well known (including on Twitter) so he gets a lot of high quality deal flow and can be very selective.
The downsides are that a) the average valuation at which investments were made in late 2021 and early 2022 were high, b) there is a high carry fee (30% of profits) on Sahil’s fund, c) early stage investing takes a long time for results to wash out, so there often isn’t much of a track record to look at (although Sahil’s track record is longer than most investors in their early 30s).
Then, not specific to Sahil’s fund, but to the structure of Angel List rolling funds:
It probably makes sense to invest consistently over time to achieve even more diversification and to make sure one is investing during times of high valuations and low valuations.
Specific to the technical setup of rolling funds, if you only subscribe for four quarters, you’ll statistically end up paying a higher percentage carry fee than if you subscribe for a longer time period.
Both of these factors favour contributing for a longer period of time. Since there are minimums on quarterly investment size, this means putting more money into this “risk” bucket. So there is a tradeoff between lowering fees + increasing diversification and concentrating risk in the one investment manager (Sahil in this case).
Since Sahil’s fund makes investments in private companies, and I’ve only been involved for a year, there’s nothing much to say about the performance of what I have invested here. It’s too early. I just have to wait and see if some of the startups are acquired or IPO. That could take 10+ years.
Private Stocks that Ronan Picks
The sources for deals were threefold:
i) Follow-on rounds of funding in companies where Sahil invested.
ii) Deals offered on platforms including Sydecar, Allocations and the dubiously named Stonks.
iii) Friends of mine who are founders.
One of the big problems is that it’s hard for me to get a lot of diversification. For example, I did seven deals in this category over one year. Sahil probably does about 50-100 and is getting much better diversification.
However, there are some even bigger issues, particularly with category ii) above:
Adverse selection. When deals are offered on syndicate-type platforms, it can be because a) the company can’t get enough bigger investors, or b) the price at which the shares are being sold is so high that the startup is happy to sell at that price to extra investors, even if small. Founders or employees may also offer their shares on these platforms. When founders or employees are selling, that can be an indication that the price will go down and they are locking in liquidity.
Restricted information. As a smaller investor, there is typically less access to information. For example, you can’t get access to the profit and loss statement or to the balance sheet. The argument in support of this practise is that early stage businesses don’t want their financials circulated to competitors. The “top” VC firms say they won’t do any deals without reviewing this kind of information in detail.
Complicated structures. As a small investor, I often end up investing in a fund (called a special purpose vehicle) that then invests in the company (or sometimes perhaps a fund in a fund that invests in the company). Each layer introduces extra legal and management risks.
These investments are private, so there is no indication of market value other than if the company raises a subsequent round of funding (and funding terms can be complicated and obscure the true value of the shares previous investors have bought):
Worldcoin - a biometric identity company. Probably overvalued when I invested.
SpaceX - a space rockets and satellite internet company. Obviously this has Musk-empire risk, but I have some hope it will do well long term.
FTX - a fraudulent crypto exchange that doesn’t deserve the full paragraph I’ll give it below.
Pipe - financing for software companies using their subscription revenue as collateral. Allegedly the founders are stepping back from leading management roles, which is not what I expected when I invested.
Stripe - payment processing. Probably overvalued but I have hopes it will do well long term.
Conception Biosciences - an embryo growth company. Early stage.
Expression Edits - improving the efficiency of DNA vaccines. Early stage.
Yeah FTX… I invested because I (mis)understood that FTX i) was profitable, ii) was one of the few exchanges that didn’t loan out customer funds, iii) gained more market share than Coinbase in two years of existence, iv) had better software (at least on the customer facing side) than Coinbase Pro [this last point I verified myself on the front end of their software, although it doesn’t say anything of what was happening on the back end]. Before investing, I wrote an article on my crypto blog pointing out all of the things I thought were odd about FTX. Unfortunately, I was unable to save myself. More unfortunately, many people had funds deposited with FTX and now can’t get those funds back.
I have a long time horizon (10+ years) for all of these public and private investments. It’s still early days for evaluating the success of my choices. Clearly many of my picks and/or the timing of my picks was bad and I experienced a lot of the challenges that make stock picking hard.
Looking towards 2023
Now that I have things set up, I’m hoping to spend less time on investing in 2023. Finding high quality public stocks (to slot in for Berkshire) and high quality REITs (to slot in for Store Capital) remains a key goal so I can minimise buying index funds. I also like to keep an eye on founder led public and private companies.
One last thing. Let me give you some tips to round things out - purely for entertainment:
And with that, I wish everyone a fruitful 2023! Cheers, Ronan
~~~
P.S. These last few days I’ve been reviewing my personal and business accounts to check my login details are all working, that I have two factor authentication properly setup and that I have everything backed-up. I go through this every three months for security. I’ve now turned the checklist and guide into a product, available from the Trelis shop: