Zack Morris's avatar
$13.5m follower assets
Part 2: Replacing Stock with Options + Cash
I've posted a follow-up article to my last post.

In this article:
  • "Synthetic long" options spreads: using a long call option and short put option spread to replicate the return on the underlying for a fraction of the up-front capital.
  • How to utilize synthetic longs to generate a free margin loan from your portfolio.
  • An idea for where to park all that excess cash.

Zack Morris's avatar
$13.5m follower assets
1 of 5
Replacing equity exposure with options + USDC on Voyager
The investment strategy laid out in this post utilizes USD Coin (USDC), a cryptocurrency known as a stablecoin and pegged to the US dollar, and Voyager, an app-based digital asset trading and financial services platform.
USDC is issued by Circle, a US-based company which is currently expected to go public in the US via SPAC combination with Concord Acquisition Corp (NYSE: CND). USDC is fully backed by USD and treasuries and is seen as the most stable, reliable and resilient stablecoin in the market, but is potentially subject to unknown risks stemming from the crypto economy and/or regulators. For example, in a worst-case scenario, one might conceive of regulators freezing and/or confiscating crypto assets, including USDC.
Voyager (TSE: VOYG | US OTC: $VYGVF**) is a publicly traded company on the Toronto Stock Exchange and US OTC. If you’re unfamiliar with different crypto platforms, you can think of it like Coinbase.**
USD deposits on Voyager are FDIC insured. However, USDC and other digital asset holdings are not FDIC insured, and in the event that Voyager were to go bankrupt, depositors of digital assets might lose some or all of their deposits.
Read more about Voyager and USDC here and here.
I highlight these risks upfront because other stablecoins, most recently Terra (UST), which was an algorithmic stablecoin not fully backed by USD, have lost their peg and gone to effectively zero. USDC’s primary competitor and the stablecoin with the largest market share currently, Tether (USDT), is another “fully backed” stablecoin but there have been doubts about the nature and quality of the assets backing USDT.
While Voyager doesn’t support algorithmic stablecoins, they do support USDT. If USDT were to lose its peg, it’s not clear to me what the ramifications would be Voyager as a company. As such, I consider the risks to include bankruptcy and potential customer forfeiture of some or all of their digital assets on the platform.
I consider these tail risks, perhaps of the nature inherent to almost any investment. As such, I do not recommend putting 100% of your capital in this trade, even though I will refer to aspects of the trade below as risk-free for simplicity of communication. Owning USDC is not risk-free in the sense that owning USD is risk-free, and some (but surely not all!) of the risks specific to USDC have been covered above.*
NOT INVESTMENT ADVICE!!!
Now, on to the fun part :)
If you’re like me, in between pondering if you’re just completely wrong about everything recently you might have been pondering how to take advantage of Voyager’s high interest rates on USDC without reducing your exposure to stocks or crypto after a 60% drawdown.
Currently, you can get paid interest on USDC held on Voyager according to the following tiers:

Just straight selling everything and investing $100k at a risk-free* blended 7.69% is not a bad option. In fact, it’s a really, really good option. The long-run average annual return for the S&P 500 is ~8%.
In hindsight, this would have been a great option in, say, November 2021. But punching out of the stock market now after the S&P 500 just suffered its worst start to the year through April since World War II might not be best time to find religion with respect to your investments (or maybe it is!).
But what if I told you you could have your cake and eat it too? Retain all of your equity exposure and protect your capital in the event we are in a multi-year bear market and stocks still have much lower to go?
The Trade
Imagine you own 100 shares of SPY at today’s closing price of $412.93 for a total investment of $41,293. By using long-dated call options and utilizing Voyager’s interest rates on USDC you can retain 100% of the upside of owning 100 shares of SPY and limit your downside to +4% over the next 2.5 years.
Yep, that’s right. Your risk " is +4%.
If the S&P 500 falls by 50%, you make 4%.
If the S&P 500 gains 50%, you make 54%.
All of the reward and none of the risk.
Here’s how (prices reflect 5/31/2022 last traded prices):
  • SELL: 100 shares SPY @ $412.93 for $41,293
  • BUY: 1 $410 (at-the-money) strike SPY call option expiring 12/20/2024 for $6,380
  • BUY: $34,913 USDC on Voyager
By replacing your stock portfolio with options, you limit your losses to the premium paid, in this case $6,380.
Of course, typically the trade-off for limiting your downside by using call options is a commensurate reduction of your upside. It’s like buying insurance. It only pays off if shit hits the fan.
A typical call option payoff profile looks like this:

The y-axis is the portfolio % return. The x-axis is the % return of the underlying equity.
The blue curve represents the % return of the option + cash portfolio. It’s losses are capped at -15.5% (the flat left half of the blue curve), which represents the premium paid to acquire the option ($6,380 loss). No matter how low the underlying equity goes, you can only lose what you paid for the option. But on the upside the option + cash portfolio underperforms by the cost of the option (illustrated by the blue curve being below the orange line for all positive returns of the underlying equity).
The orange line represents the % return of the all stock portfolio. The orange line is just y = x.
Here’s the same payoff profile using portfolio $ value for the y-axis instead of % returns. Remember our starting portfolio is $41,293, indicated by the intersect of the orange line at 0% return.

Options are a capital efficient way to get exposure to financial asset prices. Said differently, they have embedded leverage.
In the trade above, you gain exposure to $41,293 worth of SPY but only have to put up $6,380 to do it. Now you’ve got SPY exposure and $34,913 in cash laying around.
The payoff profiles above assume you don’t earn any return on that cash. For the better part of the last 15 years, that has been an accurate assumption and thus this trade hasn’t been as exciting. The unique opportunity we are presented today arises from the fact that we can invest a stable, dollar-pegged, risk-free asset in USDC at advantageous interest rates of up to 9%.
Let’s look at these payoff profiles again, this time assuming we invest the $34,913 in USDC on Voyager at the tiers offered above.


Notice that the blue “options+cash” curve is now permanently above the orange “stock” line. The rates we can get on USDC are so good that we can more than recoup the premium paid for the call option in interest paid on USDC over our holding period, which is determined by the expiration date on our option, 12/20/2024 (2.56 years from now).
The blended interest rate on $34,913 invested in USDC on Voyager is 8.5%. $34,913 compounded at 8.5% for 2.56 years = $43,026 for a $8,113 gain on investment.
This $8,113 gain more than pays for the $6,380 premium on our option!
Thus, by replacing our 100 shares of SPY with a 12/20/2024 $410 strike call option and cash invested in USDC on Voyager, we can create a portfolio with more return for less risk.
We effectively get paid to take on an insurance policy. We lock-in a minimum 4% portfolio level gain over the 2.56 year holding period while retaining all of the upside if the market takes off.
Reward: check. Risk: none*.
Absent tax consequences or an inability or aversion to holding options and/or USDC on Voyager (fair!), or a view that the interest rates on USDC are going to imminently collapse (also fair!), there’s not a good reason in my mind to continue holding SPY exposure when implied volatility is this low in this environment and you can earn 9% on cash.
The Other Trade
Let’s say you actually have a view stocks have bottomed and expect decent returns from here over the next couple years. You’re willing to take on a little downside risk for some more upside exposure.
By purchasing two options contracts instead of one, you can juice your returns and get a more convex payoff curve.
  • SELL: 100 shares SPY @ $412.93 for $41,293
  • BUY: 2 $410 (ATM) strike SPY call options expiring 12/20/2024 for $12,760
  • BUY: $28,533 USDC on Voyager


Now you’re risk is truncated at -14% since you’re spending twice as much on premium and have less cash left over to invest in USDC.
Notice now we also have some area where the blue payoff curve is below the orange payoff line of simply owning equity. If SPY returns all in a range of -14% to 12% from now until 12/20/2024, we will have performed worse than if we had just continued to hold SPY.
But notice also how we start to outperform more and more for higher returns of the underlying SPY. If SPY gains 50% from here, this portfolio returns a whopping 87%, as opposed to the 54% in our risk-free* portfolio construction above. With a 50% gain in SPY during our holding period, this portfolio grows to a nominal $77,265 vs. the prior portfolio’s $63,955. This turbocharged portfolio has better returns for all returns of the underlying SPY 18% or greater.
What we have created is functionally a way to maximize returns on the view that the stock market is going to rebound strongly from current levels over the next 2.5 years, while keeping a parachute in our back pocket in case we’re totally wrong. In a sideways market, we end up leaking capital.
A Few Considerations…
  1. Your actual returns won’t precisely match the payoff curves above due to other factors that influence the price of your option, namely time to expiry and volatility. But if you hold all the way to expiry (when time value and volatility = 0) your payoff curve will match the graphs above.
  1. Why the 12/20/2024 expiration date? It’s simply the longest-dated option available currently. We want to utilize the longest-dated option available to us because the time-value decay on the option will be the slowest. If you do this trade, you’ll want to keep an eye on the options chain and probably roll your exposure into the longer dated expirations as they are listed, absent any tax consequences or an updated view (e.g. more bullish or bearish).
  1. This trade only works as advertised if Voyager continues to offer the same interest rates on USDC for the duration of the trade. If the rates adjust down (or up!), the model inputs need to change and the trade reconsidered. Here is a google sheet with the model that produces the payoff curves above. The inputs, including interest rates on USDC, are in blue. Change the static blue inputs and the payoff curves should adjust dynamically.
  1. Taxes! Before you run out and sell all your equity exposure to buy options, consider taxes. If you sell equity you might have a taxable event (if you have a gain). If you have a loss, replacing exposure with options may be considered a wash sale. If it is a wash sale, your cost basis on your new position is adjusted upwards by the amount of the loss (i.e. you don’t lose your capital loss in a wash sale, you just don’t incur it yet - it remains unrealized).
  1. One disadvantage of holding options instead of equity is you have a forced taxable event when the option expires. Simply holding SPY, in the example above, might be more tax efficient depending on your tax status.
  1. You can do this with any stock or ETF that has listed options! I just used SPY for illustrative purposes. One caveat though - options cover 100 share lots of the underlying, so you need to have at least ~100 shares of the underlying in order to accurately replace your exposure with options. If you have 200 shares of the underlying, you buy two options contracts to match the exposure; 300, three, etc. As such, replicating this trade is probably only feasible for most retail investors with either large index positions or positions in individual stocks with lower nominal stock prices. Not too many people can afford 100+ shares of AMZN or GOOG (pre-split).
  1. This trade is most attractive on a relative basis for equities that have low volatility, since options premiums on low-vol stocks are lower.
  1. For example (considering points 6 and 7) I’m executing this style of trade in my portfolio right now on DBX, ANGI, ATUS, and KRBN. I modeled it for ARKG and SNAP, but the implied volatility on these equities is so high that the option premium costs more than the potential gain on investment in USDC, making this a less attractive trade for continued ARKG or SNAP exposure.
  1. If you like this trade in theory but don’t want to fux with anything on crypto rails right now, Series I Savings Bonds are currently yielding 9.62%. It’s a 30 year bond redeemable with no penalty after 5 years and with a 3-month interest penalty after 1 year. The rate is linked to CPI inflation and resets every 6 months. The maximum investment is $10,000 per individual per year.
Thanks to Harley Bassman (@convexitymaven on Twitter) for the idea that inspired this trade. Here’s a link to his piece from November 2021 where he explains what I try to explain above, but way better. If I only I’d have listened to him then…
Disclosure: I own USDC, DBX+calls, ANGI+calls, ATUS+calls, KRBN+calls and ARKG
post mediapost media
This is awesome, thanks for sharing all this! Loved the point about how "options are a capital efficient way to get exposure to financial asset prices.--> They have embedded leverage."

Question though, why is Voyager offering such a high rate on USDC? Isn't that a little suspect since you can't get that high of a rate on USDC elsewhere? Sticks out to me as unsustainable 👀

But love the idea and how you laid it out, especially all the considerations you added.
View 3 more comments
Compound Collaboration, Month #22
Every month I put aside some money into a portfolio aimed at long-term bets over the next 20 years. I will be gifting this portfolio to my future kids someday. I hope to use these memos as an educational tool to teach them about the world. With any luck, managing the portfolio will become a shared activity to collaborate on as they grow up.

It is one of the main reasons why I invest.

Performance from the first 21 months:
‌‌Month #1 Aug 2020: $ARKK -46%
Month #2 Sep 2020: $ARKG -46%
Month #3 Oct 2020: $BTC.X +152%
Month #4 Nov 2020: $BTC.X +60%
Month #5 Dec 2020: $NVDA +40%
Month #6 Jan 2021: $VT +2%
Month #7 Feb 2021: $PACB -80%
Month #8 Mar 2021: $TSM -15%
Month #9 Apr 2021: $KLIC +4%
Month #10 May 2021: $TTD -25%
Month #11 Jun 2021: $ETH.X -12%
Month #12 Jul 2021: $ETH.X 18%
Month #13 Aug 2021: $ROKU -74%
Month #14 Sept 2021: $ETH.X -37%
Month #15 Oct. 2021: $RBLX -58%
Month #16 Nov. 2021: $APPS -60%
Month #17 Dec. 2021: $VMEO -51%
Month #18 Jan. 2022: Cash 0%
Month #19 Feb. 2022: $OPEN -11%
Month #20 Mar 2022: $RRC +34%
Month #21 Apr 2022: $TPL +13%

Total portfolio return: -9.9%

Return if every month I had just bought the S&P 500: +2.16%

Being down ~10% isn't fun. But here's a quick reflection on how we got here:

• This portfolio is for long term bets
• Since the time horizon is so long, I've been inclined to bet on innovation; things that might be worth a lot more in the future than they are today. i.e. their cash flows will come primarily 20 years in the future
• In the last six months we've seen the fed funds rate go from 0 to 1%, with anticipation of getting up to 3% by the end of the year.
• Changes in interest rates have a huge effect on companies whose cash flows are in the future. Supposed future earnings 30 years from now get priced into the value of the asset today.
• Example: If you think a company will earn $100 dollars 30 years from now, at an interest rate of 1% that $100 is worth ~$74 today.

Here's the formula:
Present value = Future sum / (1+ interest rate)^number of periods
PV = $100 / (1 + .01)^30
PV = $74.19

Stated another way— if you have $74.19 today and you also have the ability to get a 1% guaranteed return every year for 30 years, you will have $100 in 30 years.

Here's the proof:

Now let's say you can get a 5% return on your money year after year instead of 1%.
How much is $100 worth 30 from now if you can invest at 5%?

The answer is $23.

At a 10% interest rate, the present value is $5.

The value of high growth stocks, whose cash flows are far out in the future, are greatly affected by the compounding nature of today's interest rates.

As an aside, this is why people obsess over what the Federal Reserve does with interest rates— it has huge investing implications. Having an essentially risk-free alternative to investing in growth stocks changes what investors are willing to pay for cash flows far out in the future.

Whether or not there's a sustainable way to predict the Fed's rate changes is another story, but the point stands that when the Fed telegraphs rate increases... you should take note.

One adjustment I've made to my "Compound Collaboration" portfolio is adding companies that are profitable today (as well as taking a cash position) in three of the last four months. But that doesn't change the fact that the rest of the portfolio is heavily overweight growth stocks and has a correlation of close to 1.

Ray Dalio outlines here that once you add around 7 assets to your portfolio that have similar correlation, you are not going to reduce your risk much by adding more highly correlated stocks. So if we're doing a post-mortem on why the above portfolio is down so much even though it has 18 different holdings— the answer is that the current holdings are very correlated.

So what's the new addition this month?

Ethereum $ETH.X

Wait, didn't we just get done talking about how growth assets that aren't making money now are getting destroyed?

Correct— however, Ethereum will be shifting to a Proof-of-Stake consensus mechanism soon (The latest speculation is this September).

Ethereum will have positive cash flows once it switches to proof-of-stake, and I believe this will catch the market's eye.

After moving to proof-of-stake, $ETH.X will much more resemble equity in a company than a currency or store of value. This is because the revenue and profit generated by the network accrues to the token holders.

You can see on cryptofees.info that Ethereum does indeed generate fee revenue.

People who stake their $ETH.X get paid out a staking rate, which is like a stock-based dividend.

Ethereum will resemble equity in a cashflow generating company.
post mediapost media
Compound Collaboration, Month #21 — Texas Pacific Land
Every month I put aside some money into a portfolio aimed at long-term bets over the next 20 years. I will be gifting this portfolio to my future kids someday. I hope to use these memos as an educational tool to teach them about the world. With any luck, managing the portfolio will become a shared activity to collaborate on as they grow up.

It is one of the main reasons why I invest.

Performance from the first 20 months:
‌‌Month #1 Aug 2020: $ARKK -42%
Month #2 Sep 2020: $ARKG -44%
Month #3 Oct 2020: $BTC.X +223%
Month #4 Nov 2020: $BTC.X +105%
Month #5 Dec 2020: $NVDA +42%
Month #6 Jan 2021: $VT +2%
Month #7 Feb 2021: $PACB -78%
Month #8 Mar 2021: $TSM -15%
Month #9 Apr 2021: $KLIC -9%
Month #10 May 2021: $TTD -15%
Month #11 Jun 2021: $ETH.X +34%
Month #12 Jul 2021: $ETH.X +25%
Month #13 Aug 2021: $ROKU -74%
Month #14 Sept 2021: $ETH.X -4%
Month #15 Oct. 2021: $RBLX -59%
Month #16 Nov. 2021: $APPS -51%
Month #17 Dec. 2021: $VMEO -43%
Month #18 Jan. 2022: Cash 0%
Month #19 Feb. 2022: $OPEN -15%
Month #20 Mar 2022: $RRC +11%

Total portfolio return: -1.02%

Return if every month I had just bought the S&P 500: +2.69%

Well this is humbling

For the first time, the total value of the portfolio has now gone negative— meaning if I needed to withdraw the money today, I would have been better off saving.

Fortunately, my kids aren't even born yet so I don't need the money today. Hopefully this memo will be a humorous stop along the journey. We shall see.

Many years from now, I hope my kids will get the chance to read this and take away the following lessons:

  • After 20 months of building this portfolio, all the work that has gone into it has cost me 1.02%. This illustrates the argument for putting your money into an S&P 500 index and calling it a day. It's way less work, and you may just come out ahead in the long run.
  • In the short term, you never know where the stock market is going to go, especially individual stocks.
  • 1-2 years is considered "short term." Investing really is played on long time-horizons.
  • Expect to be wrong a lot in investing. So far 12 of the 20 picks I've made have lost money. My hit rate at the moment is 35%.

Things may keep getting worse before they get better. The extremely long time horizon intended for this portfolio allows me to sit tight. It's not fun to be down vs. the S&P 500 or in general, but for now, it's one stop along the way.

This month's addition:

Texas Pacific Land
Ticker: $TPL
Market Cap: 10.66B
Should tip the hat to Horizon Kinetics who have been big believers in $TPL for a long time (decades).

History
Texas Pacific land started out as a railroad 1871. The idea for the railroad was to connect West Texas with the coast of California. A federal charter granted land to the company for every mile of railroad it built. The company earned three and a half million acres of West Texas land from building the railroad. But guess how many people lived in West Texas in 1871? Pretty much no one! So the railroad went out of business— but the company still owned all that sweet land. So the Texas Pacific Land Trust was formed to manage the land, which it would sell and then return the money to owners of the trust certificates. In 1920, they stopped selling the land because, you guessed it: they discovered oil. Texas Pacific sold over 75% of its original landholdings. But even after all that, it is still the largest landowner in Texas. The remaining land is in the Permian basin of west Texas, the most productive oil field in the world right now. Texas Pacific now leases its land to oil companies and collects royalties from them.

Investable Attributes
  • The Dividend payout ratio is about 65%. Part of the thesis is that this will increase.
  • The company doesn't have any debt. It doesn't need to take in capital to grow.
  • It's all about the royalties. They are the biggest catalyst going forward for dividend growth. They don't have to drill the traditional oil. Companies lease land from Texas Pacific and pay them about a one 16th of royalty on the oil they extract, not to mention any water, right usage and other usages.
  • Texas Pacific's gross margin is always close to 100% EBIT and EBITDA margins are usually around mid 90%.
  • Free cashflow margins can run the high sixties, but in recent years this has dipped down into the low forties.
  • Texas Pacific has great operational leverage to rising oil prices and with no need to retain cash, the company returns the bulk of it to us, the shareholders.

Another part of the thesis is that in January 2021 Texas Pacific Land went from being a Trust to a Corporation. The reason this is important is that as a trust, $TPL was not part of the 'investable universe' for a lot of funds and ETFs. Now that it's a corporation, many more entities have access to invest in it.

The Main Thesis:
Texas Pacific Land is a way to get exposure to the price of oil without all the operational execution risk of an oil company. If the price of oil goes up, more oil companies will want to drill on $TPL's land, and the more royalties they will be able to collect.

I think oil demand will stay strong for years, and even in a world where we move primarily to renewables, there will still be a lot of uses for oil in the making of solar and renewable energy infrastructure. Even if oil prices stay where they are now, Texas Pacific is going to be highly profitable and flush with a ton of cash to return to shareholders.

Texas Pacific's estimates that the breakeven oil price for the bulk of their reserves is about $40 per barrel. If the price of oil stays above $40, Texas Pacific should see increased drilling activity on their land and increased revenue growth.

Now, oil reserves are a declining asset. One day Texas Pacific's oil reserves will be gone, or at least only economically viable with a really high price of oil. Right now, Texas Pacific projects that they have 19 years of reserves at a $40 per barrel breakeven price.

Risks
  • Oil Prices decline below $40 a barrel.
  • $TPL's reserves are depleted quicker than the expected 19 years

Things that aren't as big of a risk as people think
  • A fracking ban — fracking bans usually only apply to public land owned by the government. Texas Pacific land is private land. They own it and they can do what they want with it. And with their mineral rights, they would not be effected by a fracking ban. They'd actually be affected positively because other sites going offline means $TPL's resources are more valuable.
  • Electric vehicles — The expectation is the electric vehicle will cause oil demand to fall off a cliff. Today EVs are an expensive niche product. They are a small percentage of total auto sells. If EV sales were to double, they'll still only account for less than 10% of all automobile cells. We need a step change in battery technology to bring the cost per vehicle down and to increase our range, to make it a daily driver for the average person. Personally, I hope this happens, but I think it will take longer than most people anticipate. I'm assuming that in the medium term oil demand will go up, and in the longer term (30 years) oil demand will remain relatively flat.

Here's my trade— bought at $1,390. Currently at $1,366.
post mediapost media
Texas Pacific Land is slowly, but very profitably, going out of business.

Until the day they run out of reserves, pretty much all their cash will go towards buybacks and dividends. Management is not interested in any crazy acquisitions or sudden moves. Slow and steady.

Main risk is oil prices. Other than that, this one should do fine for the next 19 years.
View 4 more comments
Compound Collaboration, Month #20
Every month I put aside some money into a portfolio aimed at long-term bets over the next 20 years. I will be gifting this portfolio to my future kids someday. I hope to use these memos as an educational tool to teach them about the world. With any luck, managing the portfolio will become a shared activity to collaborate on as they grow up.

It is one of the main reasons why I invest.

Performance from the first 19 months:
‌‌Month #1 Aug 2020: $ARKK -18%
Month #2 Sep 2020: $ARKG -24%
Month #3 Oct 2020: $BTC.X +294%
Month #4 Nov 2020: $BTC.X +150%
Month #5 Dec 2020: $NVDA +107%
Month #6 Jan 2021: $VT +12%
Month #7 Feb 2021: $PACB -68%
Month #8 Mar 2021: $TSM -3%
Month #9 Apr 2021: $KLIC +10%
Month #10 May 2021: $TTD +2%
Month #11 Jun 2021: $ETH.X +60%
Month #12 Jul 2021: $ETH.X +49%
Month #13 Aug 2021: $ROKU -65%
Month #14 Sept 2021: $ETH.X +15%
Month #15 Oct. 2021: $RBLX -37%
Month #16 Nov. 2021: $APPS -32%
Month #17 Dec. 2021: $VMEO -33%
Month #18 Jan. 2022: Cash 0%
Month #19 Feb. 2022: $OPEN +8%

Total portfolio return: 22.5%

Return if every month I had just bought the S&P 500: 13.7%

Addition for Month #20: Range Resources $RRC Resource.

Range Resources is a petroleum and natural gas exploration and production company headquartered in Fort Worth, Texas (I used to live in Dallas circa 2019).

Macro Thesis:
I want the world to transition to sustainable energy as much as anyone. But I think the current expectations of how fast we can move completely to renewables is unrealistic.

It generally takes about 5 decades for the world to transition from one energy system to another. If we are extremely disciplined, we may be able to speed up the transition to renewables in as little as 20 years.

But much of the investment world is acting as if electric cars will make oil obsolete in the next five years.

Oil demand is not going away in the next five years.

While the use of renewables is expected to grow faster than fossil fuels, the US Energy Information Administration (EIA) says coal, oil and natural gas will still account for 77% of our energy in 2040. The EIA reckons that total world energy consumption will rise by nearly 30% over the coming decades. Even if renewables grow exponentially, they will still need a lot of help from fossil fuels to meet demand.

You may see Teslas on the road every day and think that the whole world is on the cusp of going green. But it's a privilege to have the resources to go green. Developing nations have disproportionately younger populations which are incentivized to pursue high growth industries that can make use of their cheap labor and growing consumer base. The economies of these countries literally need energy to run. Going green for these countries is cost-prohibitive and quality-of-live reducing.

The fastest way to make green infrastructure is by using the tools we have today. Which means using a lot more oil.

Range Resources is bet that the oil industry has been overly discounted and still has a long life ahead of it.

Company Specific Thesis:
Range Resources is:
• A top 10 U.S. producer of natural gas
• Top natural gas exporter
• The most capital efficient operator in Appalachia
• Has the longest core inventory life in Appalachia
• Is a leader in environmental practices

Range Resources has a low decline rate. The 'decline rate' is a method for estimating reserves and predicting the rate of oil production. It shows the pace at which production is expected to decline over the lifetime of an energy asset. The lower the decline rate, the longer the oil well will last. $RRC's low decline rate drives sustainably low capital requirements.

Because their core inventory has a multi-decade life expectation, Range Resources has a long runway of free cash flow generation, which they are returning to shareholders via dividends and a $500 million share repurchase program.

$RRC is also a leader in environmental practices. They are targeting net zero greenhouse gas emissions by 2025.

Summary:
I'm adding Range Resources to the portfolio because:
• High FCF yield
• Low decline rate
• Dividend and buyback in place
• Good balance sheet
• Trades at a discount to NAV
• Has a strong environmental track record
• Energy demand will force investment oil to return in full force
post media
"It generally takes about 5 decades for the world to transition from one energy system to another." - Interesting! If this is the case for energy, imagine how long it takes for a transition to an entirely new reserve currency 😉 Nice $BTC.X gains, btw
View 5 more comments
Compound Collaboration, Month 18 & 19
Every month I put aside some money into a portfolio aimed at long-term bets over the next 20 years. I will be gifting this portfolio to my future kids someday. I hope to use these memos as an educational tool to teach them about the world. With any luck, managing the portfolio will become a shared activity to collaborate on as they grow up.

It is one of the main reasons why I invest.

Performance from the first 16 months:
‌‌Month #1 Aug 2020: $ARKK -16%
Month #2 Sep 2020: $ARKG -22%
Month #3 Oct 2020: $BTC.X +265%
Month #4 Nov 2020: $BTC.X +132%
Month #5 Dec 2020: $NVDA +82%
Month #6 Jan 2021: $VT +8%
Month #7 Feb 2021: $PACB -61%
Month #8 Mar 2021: $TSM -3%
Month #9 Apr 2021: $KLIC +2%
Month #10 May 2021: $TTD +22%
Month #11 Jun 2021: $ETH.X +39%
Month #12 Jul 2021: $ETH.X +30%
Month #13 Aug 2021: $ROKU -62%
Month #14 Sept 2021: $ETH.X 0%
Month #15 Oct. 2021: $RBLX -32%
Month #16 Nov. 2021 $APPS -27%
Month #17 Dec. 2021 $VMEO -28%
Month #18 Jan. 2022 Cash 0%

Total portfolio return: 17%

In January I didn't make a buy— markets have fallen a ton and there isn't necessarily any mandate to buy a new stock every month. Roku and Pacific Biosciences have gotten torched; everything bought after September of last year is down 30%.

Addition for February: Opendoor $OPEN

My thoughts on Opendoor can be found here.

Opendoor is a very risky bet. They're extremely early in what they're trying to do. Over 20 years, this will likely be either a 0 or home-run.
post media
Question: why are some tickers green, and others red? Is that based on the most recent trading day’s change in price?
View 9 more comments
Compound Collaboration, Month #17
Every month I put aside some money into a portfolio aimed at long-term bets over the next 20 years. I will be gifting this portfolio to my future kids someday. I hope to use these memos as an educational tool to teach them about the world. With any luck, managing the portfolio will become a shared activity to collaborate on as they grow up.

It is one of the main reasons why I invest.

Performance from the first 16 months:
‌‌Month #1 Aug 2020: $ARKK +14%
Month #2 Sep 2020: $ARKG +0%
Month #3 Oct 2020: $BTC.X +286%
Month #4 Nov 2020: $BTC.X +146%
Month #5 Dec 2020: $NVDA +120%
Month #6 Jan 2021: $VT +17%
Month #7 Feb 2021: $PACB -32%
Month #8 Mar 2021: $TSM +9%
Month #9 Apr 2021: $KLIC +18%
Month #10 May 2021: $TTD +32%
Month #11 Jun 2021: $ETH.X +73%
Month #12 Jul 2021: $ETH.X +61%
Month #13 Aug 2021: $ROKU -37%
Month #14 Sept 2021: $ETH.X +24%
Month #15 Oct. 2021: $RBLX +36%
Month #16 Nov. 2021 $APPS -7%

Total Portfolio return: 53%

This month's addition: Vimeo

Quick Thoughts:

$VMEO has 200 million users, and less than 1% of those are paying subscribers.

Vimeo is shifting their strategy towards enterprise. They're going to start charging "per seat", which means that if one person in an organization is using Vimeo, it is easier to get other people in that organization to become paying subscribers as well.

70% of existing paid users were one free users. So their current users are a great place to start converting people.

This is a bet that this new business model takes hold.
post media
Compound Collaboration, Month #16
Every month I put aside some money into a portfolio aimed at long-term bets over the next 20 years. I will be gifting this portfolio to my future kids someday. I hope to use these memos as an educational tool to teach them about the world. With any luck, managing the portfolio will become a shared activity to collaborate on as they grow up.

It is one of the main reasons why I invest.

Performance from the first 15 months:

‌‌Month #1 Aug 2020: $ARKK +26%
Month #2 Sep 2020: $ARKG +2%
Month #3 Oct 2020: $BTC.X +378%
Month #4 Nov 2020: $BTC.X +203%
Month #5 Dec 2020: $NVDA +144%
Month #6 Jan 2021: $VT +13%
Month #7 Feb 2021: $PACB -24%
Month #8 Mar 2021: $TSM +6%
Month #9 Apr 2021: $KLIC +12%
Month #10 May 2021: $TTD 47%
Month #11 Jun 2021: $ETH.X +123%
Month #12 Jul 2021: $ETH.X +108%
Month #13 Aug 2021: $ROKU -38%
Month #14 Sept 2021: $ETH.X +60%
Month #15 Oct. 2021: $RBLX +66%

Total portfolio return: 69.1%

This month's addition: Digital Turbine $APPS

Digital Turbine is an ad-tech company.

What they used to do: Pre-install apps onto mobile phones.

Over the last couple of years through a series of acquisitions they've completely transformed their business.

What they are now: A platform for mobile advertising which has both supply-side and demand sides of the market.

Four or five years ago they were only installed on around 15 million devices. Today they are now installed on almost 600 million Android phones.

A key product: single-tap app installs. Instead of going to the Google play store and hitting download and install, you can just click on an ad and immediately download the app to your phone. This is something app developers are willing to pay a lot for.

They are now producing profits on an Adjusted EBITDA basis and non-GAAP EPS basis.

The Bull Case:

  • Strong Macro trends: Mobile advertising is a huge category and there will be a lot more dollars transitioning to mobile advertising in the coming years.
  • Sales and marketing spend is small compared to their gross profit, which means they can grow without spending tons of money on sales and marketing.
  • Network effects around building a buy and sell-side platform for mobile advertising. There are switching costs once mobile carriers and advertisers start using Digital Turbine's platform.
  • Free cash flow and earnings are positive, which is great because they can fund their own growth going forward.

Bear Case
  • Balance Sheet: Lots of goodwill from the acquisitions (goodwill is not good), and also lots of long term debt and not a lot of cash in comparison.
  • Concentration risks: $APPS sells into several of the large mobile phone carriers. Revenue is only coming from a few sources.
  • Has primarily grown by acquisitions. Integrating acquisitions successfully is hard.
  • Dependence on Google. Google could pull the rug on Digital Turbine and there wouldn't be much they could do about it.

Digital Turbine is down 41% in the last month— which is even more than some similar growth names like:
$ROKU (-28%)
$PYPL (-20%)
$MELI (-20%)
$FVRR (-18%)

The Bet:
Now is a good entry to buy a fast growing company that can really shine in the mobile advertising space in the coming years.
post media
Compound Collaboration, Month #15
Every month I put aside some money into a portfolio aimed at long-term bets over the next 20 years. I will be gifting this portfolio to my future kids someday. I hope to use these memos as an educational tool to teach them about the world. With any luck, managing the portfolio will become a shared activity to collaborate on as they grow up.

It is one of the main reasons why I invest.

Performance from the first 14 months:

‌‌Month #1 Aug 2020: $ARKK +45%
Month #2 Sep 2020: $ARKG +21%
Month #3 Oct 2020: $BTC.X +407%
Month #4 Nov 2020: $BTC.X +222%
Month #5 Dec 2020: $NVDA +91%
Month #6 Jan 2021: $VT +16%
Month #7 Feb 2021: $PACB -13%
Month #8 Mar 2021: $TSM +3%
Month #9 Apr 2021: $KLIC +11%
Month #10 May 2021: $TTD 7%
Month #11 Jun 2021: $ETH.X +100%
Month #12 Jul 2021: $ETH.X +86%
Month #13 Aug 2021: $ROKU -17%
Month #14 Sept 2021: $ETH.X +44%

Total portfolio return: 86%

This month's addition: Roblox $RBLX

Roblox is a video game company that is enabling developers to create games and get paid for doing so. Rather than trying to build everything themselves, they are creating tools so that others can build whatever games they want, and then help them distribute and monetize their games.

Some impressive stats, courtesy of @sidnistandard (you should follow her):

  • More than two-thirds of U.S. kids aged 9 to 12 play Roblox
  • Those kids spend an average of 2.6 hours a day on Roblox
  • 43% of Roblox users are 13 and over
  • The fastest-growing demographic is ages 17-24
  • Ad solutions are being made available to creators as a revenue stream
  • Roblox has 43 million daily active players
  • Revenue is expected to be between $167m & $170m, up ~98% YOY
  • Roblox is on both mobile and desktop
  • Virtual concerts show the potential for further digital events

Risks are that the young users might 'age out' of Roblox as their tastes change when they get older. But video games as a career, live events, and full economies being built might be able to mature with the current users. That's this month's bet.
post media
I've got a 5yr old and a 3yr old and they already know it's a good thing when "green is winning".

But I've never thought about what you're doing, and I think having the thought it will be for them in the future rather than for me in the nearer-term will result in even more prudence. I'll think I'll be pinching this idea.
View 7 more comments
Next
Commonstock is a social network that amplifies the knowledge of the best investors, verified by actual track records for signal over noise. Community members can link their existing brokerage accounts and share their real time portfolio, performance and trades (by percent only, dollar amounts never shared). Commonstock is not a brokerage, but a social layer on top of existing brokerages helping to create more engaged and informed investors.