@nathanworden

Nathan Worden's avatar

$320M follower assets

Buy and continually verify. MBA and MLD. Long term mindset. Innovation enthusiast.

Optimistic, but not inappropriately so.

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New position in SMR
NuScale Power at $10.67
Compound Collaboration, Month #23
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 22 months:
‌‌Month #1 Aug 2020: $ARKK -55%
Month #2 Sep 2020: $ARKG -51%
Month #3 Oct 2020: $BTC.X +55%
Month #4 Nov 2020: $BTC.X 0%
Month #5 Dec 2020: $NVDA +17%
Month #6 Jan 2021: $VT -7%
Month #7 Feb 2021: $PACB -86%
Month #8 Mar 2021: $TSM -26%
Month #9 Apr 2021: $KLIC -26%
Month #10 May 2021: $TTD -19%
Month #11 Jun 2021: $ETH.X -51%
Month #12 Jul 2021: $ETH.X -55%
Month #13 Aug 2021: $ROKU -78%
Month #14 Sept 2021: $ETH.X -65%
Month #15 Oct. 2021: $RBLX -57%
Month #16 Nov. 2021: $APPS 74%
Month #17 Dec. 2021: $VMEO -67%
Month #18 Jan. 2022: Cash 0%
Month #19 Feb. 2022: $OPEN -47%
Month #20 Mar 2022: $RRC -8%
Month #21 Apr 2022: $TPL +7%
Month #22 May 2022: $ETH.X -41%
Total Portfolio Return: -31%
Well things have gone from bad to worse.
Pretty bad timing all around— just closed on a house yesterday and will be moving to Orange County as my wife got a job down there. Had to sell a lot of stocks for the down payment.
This month's addition to the portfolio is Nuscale Power Corp $SMR
Newscale designs and markets small modular nuclear reactors. It is headquartered in Tigard, Oregon, United States. They were founded in my hometown of Corvallis, Oregon.
NuScale has been approved to build test reactors in Idaho, in 2029 and 2030.
It's a very long term bet on nuclear power.
Nathan Worden
5d
2 Comments
9 Upvotes
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Bought 46% more ETH.X
Ethereum at $1,736.29
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.
Nathan Worden
May 30
7 Comments
17 Upvotes
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Cattle futures
Futures markets exist for risk management.
Let’s say you are a cattle producer. The price of cattle can be impacted by many factors— weather, seasonality, global supply & demand. Whether you’re selling or buying cattle, something random like a fire at the Tyson Foods factory can mess up your long term financial planning.
If you are a cattle seller, you could use cattle futures to lock in the price for your cattle a year in advance. That’s a bit of a super power for you, because now you know how much you can pay for inputs like corn and still turn a profit. Cattle futures protect you against decreasing cattle prices at the wrong time.
Without futures, cattle producers would always be at the mercy of market prices at the time of sale.
For investors, cattle futures offer an interesting way to go long (or short) the commodity.
Before I go any further I want to note that futures contracts use leverage. A relatively small amount of money is required to control assets having a much greater value. The leverage of futures can work for you when prices move in the direction you anticipate or against you when prices move in the opposite direction. Futures are not for everyone.
Additionally, in order to trade futures you need a special account. Your normal stock brokerage won't let you trade futures directly, which is why I bought an ETN— but ETN's introduce their own risk tradeoffs:
ETN stands for 'Exchange Traded Note'— and they are riskier than ordinary unsecured debt securities because they have no principal protection. Owning the ETN is not the same as owning interests in the cattle futures contracts that the ETN is based on.
The reason I bought $COW:
The Annual Cattle Inventory Report published by USDA estimated overall inventory on January 1st, 2022 is down 2% from 2021. This declining cattle inventory suggests we're heading into the last couple of years of the contraction phase of the cattle inventory cycle:
Supply is decreasing at the same time as demand for beef is being under-appreciated. The USDA has forecasted a small decrease in consumer demand for meat in the next year, but I think beef demand will increase because:
• Consumer income levels will continue to increase, surprising people with how much consumers are willing to pay for beef.
• Prices of substitutes and complements will rise as fast or faster than beef.
• Consumer tastes and preferences will return strongly to beef as beef substitute fads start to wear off.
Low supply and high demand for beef make me bullish on beef the commodity. I'm not so sure the $COW subindex ETN is the best way to play it, so my starter position is very small as I continue to research whether or not I want to actually go buy the futures directly.
If anyone else out there has more experience with futures, would love to hear about your experience.
Nathan Worden
May 27
35 Comments
25 Upvotes
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Wow, only the 2nd person to trade $COW.X ever on CS. Why the new position?
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New position in TPL
Texas Pacific Land at $1,390.41
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.
Nathan Worden
April 29
5 Comments
11 Upvotes
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