Technology – This is Worth Reading

SoFi – Making Its Footprint Bigger Than Its Foot

It’s been a while since I’ve been excited about a stock, but over the weekend my friend Jack mentioned he is very bullish on SoFi and he made quite the convincing case. Intrigued, I spent a few days doing some research. My conclusion on SoFi is that it is the best emerging FinTech company to challenge the legacy FDIC banks and their 500 million customer accounts. While not without its risks, SoFi is a true growth stock that has a strong and differentiated product offering, a moat around its revenue not shared with competitors, strong and proven leadership, and a clear, simple vision its employees and customers can rally around.

Here’s what SoFi, or Social Finance – the full name no longer seems to be aligned with the company – does in their own words:

SoFi Technologies, Inc. is a financial services platform. SoFi was founded in 2011 to offer an innovative approach to the private student loan market by providing student loan refinancing options. The Company conducts its business through three reportable segments: Lending, Technology Platform and Financial Services.
SoFi 10Q

SoFi launched in August 2011 and currently offers digital financial services to 3 million members, including student loan refinancing, mortgages, personal loans, credit, cards, investing (equities and crypto), and banking services. SoFi’s sales pitch is that they are the only one-stop-shop where all their products are better than single offerings by competitors. They offer no fees, partial shares, crypto, no-fee ETFs, and offer IPOs. Funds are available the day you open your account. I will say, I didn’t find another fintech company that offers their breadth of services and definitely didn’t find one that puts all of them right on their customer’s home page.

Commercialization of direct to consumer technology has unfolded in media, video, and e-commerce, but it hasn’t happened in direct to consumer financial services company.

In plain english, the above sentence that I lightly lifted from SoFi’s CEO means digital banks who interact directly with customers investment, loan, and payment products have not yet challenged legacy banks that can profit by buying up loans from intermediaries and providing backend services to frontend facing companies.

SoFi thinks there is potential to take a shot at the big guys and their 500mm customer accounts in the US, and from the outside, it looks like they have the right selection products, fast customer onboarding, and convenient apps facilitating casual usage and research.

From Non-Bank to Bank

Digital Wallets are not banks. To use digital wallets and avoid fees for sending money, you can connect your bank through debit card or banking information. The key difference between non-bank digital wallets and banks is that non-banks cannot hold a balance. Funds held in a digital wallet are actually held by a bank that partners with the wallet for financial benefit. For example, the Venmo Debit Card is issued by Bancorp Bank. Digital wallets, in general, cannot offer interest on funds held in the wallet. Digital wallets can still facilitate alternative financial services, such as investment, risk pooling, financial consulting, and so on. They cannot hold balances or loans for gain.

Most of Millenials and GenZers use peer-to-peer payment facilitated by digital wallets like Venmo, CashApp, and PayPal to send money to friends and hold a balance. Digital wallets easy to use, fast to get started, and widely accepted for payment. All you need to get started is a debit or credit card. These wallets partner with banks; they can originate loans, but cannot benefit from hold for investment. They do not have direct access Fed money nor direct access to FDIC insurance.

In March 2021 SoFi purchased Golden Pacific Bank financed by $750mm in capital. Last month SoFi received approval to become a national bank from the Office of the Comptroller of Currency and the Federal Reserve. SoFi can now accept deposits from customers and offer interest and there is currently a wait-list to open a checking account offering 1% APY, no account overdraft fees, 2-day-early paycheck, no ATM fees and other smaller benefits.

SoFi’s financials, along with its customers, can also benefit from the bank charter. CEO Anthony Noto says SoFi will now operate a hybrid of gain on sale and holding for investment; SoFi will increase the average time loans spend on its books from 90 days to 180 days because they have access to more funds and they will earn more holding for investment. This is meaningful in a rising rates environment, but it shouldn’t be overstated because they are just getting started whereas the legacy banks have massive balance sheets and are much better positioned to make profits on spreads.

As a bank, deposits can fund loans. Loans on SoFi will include a stand-alone offering and a direct deposit offering. Big banks like BofA can shave off a few basis points on loans if you have a checking account with them. Customer data from one financial product can inform risk assessments and more accurate pricing for other financial products. Starting now, SoFi can utilize its customers data to facilitate better offers across its suite of financial products.

Leadership, Vision & Execution

Anthony Noto is the CEO of SoFi. He is 53 years old. He worked at Goldman Sachs from 1999 – 2008 where he joined the NFL as CFO until 2010. He then went back to Goldman Sachs to co-head the global media group where he won the role of lead underwriter on the Twitter IPO. In 2014 he joined Twitter as the CFO and later COO. Finally in 2018 he joined SoFi as the CEO. He’s been successful and clearly built great relationships. I specifically like the fact he returned to Goldman after his stint at the NFL. He also formed a good relationship with Twitter CEO Dick Costolo. He seems like he has the right combination of finance and tech experience to lead SoFi in the right direction amidst significant competition.

After watching a few interviews with Anthony Soto, it is clear he exudes strong leadership and is laser-focused on execution. As Anthony Soto says multiple times, “Selection, Fast, Content, Convenience, Better Together”. Every employee should be able to say on command what the mission of the company is and what they need to execute to be successful. While this is true for any company, it’s especially true for a fast-flying technology company. You can go to the company’s homepage and basically build an org chart. I don’t know anyone who works there, but I assume everyone who works there has crystal clear direction.

Pivoting Away From Student Loans

SoFi’s first major product offering was student loan refinancing and was responsible for their initial success. However, in March 2020 President Trump announced a pause on all payments on federal student loans due to the onset of the pandemic. After multiple extensions, that moratorium is set to expire in May 2022. In an interview with Yahoo Finance, Anthony Noto said “our student loan business got cut in more than half” and “that business has been running at about 50% of the pre-COVID volume for the last 20 months.”

Federal student loans over the past decade have grown from $642bn to $1.566tr, according to a report from the Bipartisan Policy Center, and the average debt per borrower increased from $23k to $37k. While this was a profitable entry-point, the student loan payment moratorium brought that to a grinding halt; no one needs to refinance a loan that they don’t have to pay.

On February 8th, Anthony Fauci claimed the ‘Full Blown’ pandemic phase of Covid was nearly over. I think it is unlikely the pause on student loan payments will continue past May of 2022 and many Americans will be looking for refinancing options. SoFi seems poised to benefit, but its success isn’t dependent on an influx of student loan refinancing.

Here’s a comparison of SoFi’s last 3 years, including last 12 months (LTM) of revenue and loan origination volume. Revenue is in millions and loan origination is in $000s

Student loan origination volume is almost half what is was in 2018 and there was a significant dip in personal loan originations in 2020 followed by a spectacular rebound over the last 12 months (this is from Q3, so data is not that recent). Also home loan origination has steadily been growing.

Revenue growth tells a different story; consistency. In April 2020 SoFi saw felt the headwinds of the pandemic and foresaw a huge drop in their main business of student loan origination and refinancing. SoFi pivoted quickly and bought a proverbial shovel during the rush into digital banking. Now emerging from the pandemic, Galileo provides a moat around longevity in the digital banking world.

Galileo Acquisition Solidifies SoFi in Digital Banking

In April 2020, SoFi bought Galileo, a banking infrastructure solution company that offers a payment processing platform and a variety of services for digital banking companies for $1.2bn. Galileo has been around for 10 years longer than SoFi and it works with many of its competitors such as Robinhood, Chime, Monzo Revolut, Varo and TransferWise. Galileo’s software connects credit card processors through APIs. It is painful for companies to switch payment processors and it is very, very difficult to build one from scratch. Galileo has grown its customer base from 49 in Q32020 to 89 in Q32021 and revenue from technology services has grown from $95mm in 2020 to $178mm in the last 12 months ending in Q3 2021.

The acquisition of Galileo provides SoFi with significant revenue diversity, in-house knowledge of core technology powering digital banking, and a chunk of its competitors now rely on its success.

Payment processing is at the core of Galileo. Vast majority of customers are using payment processing. Integrating with merchants, banks, ATM networks, ACH, etc. Galileo is like a data center. No one is building their own data centers. SoFi customers inform Galileo’s product offerings even before Galileo’s customers know what they want. Vertical integration at its finest.

Can SoFi Keep Growing?

SoFi has grown consistently since inception and successfully navigated multiple changing financial environments. Its Q3 Earnings Presentation clearly lays out a story of continued growth.

The highlights from SoFi’s Q3 earnings presentation shows year-over-year member growth of 96% to 2.9mm, of which 377k members were added since the prior quarter. Total Products increased 108% to 4.3mm. Total products means the aggregate number of lending and financial services products that members selected on SoFi since inception through the reporting date (so this would include loans that have been fully repaid).

The most interesting, and to me important, part of the growth story is SoFi Money, SoFi Invest, and SoFi Credit Card drove 79% of new member growth. These financial services are simpler and faster to use than refinancing loans or taking out a personal loan. SoFi’s offers easy-to-use investment and every day spending products that is desired by all GenZers and Millennials. It is much easier and cheaper for SoFi to offer its breadth of existing financial products to people who are already customers of SoFi. Moreover, and I’ll hint at my conclusion here, since SoFi can garner significant growth from multiple product offerings, it can use its status and access to capital as bank to offer better rates and lower fees to customers and then provide even lower fees to customers who use other SoFi products. BofA reduced my mortgage loan a few basis points because I already had a checking and savings account. All major banks that originate mortgages and loans do this and it works.

General Market Woes

There’s a lot of negative press about FinTech and $MEME stocks right now, which is dragging down growth stocks. Non-profitable technology stocks, including FinTech stocks, and $MEME stocks (SoFi is all 3) flew too close to the sun and crashed back to earth nursing their burns.

While the latest drop has been tough for a lot of investors, at least there is some rationality in the markets. The upside to these charts is that we are back where we started pre-pandemic. If you believe we are headed for a recession, macroeconomic forces will likely drag these stocks down with it, SoFi included. If you think things are back to normal, or at least not going to get worse, now is a great time to buy stocks with great fundamentals. That’s why I’m writing about SoFi.

What’s My Downside?

I believe SoFi could drop as much as 50% in the next few months. The main ratio I’m looking at is the PS Ratio, or the company’s market cap divided by the company’s sales for the previous 12 months. Here’s SoFi’s PS ratio since it went public via reverse merger in June 2021

While the PS ratio is the lowest it has been, and half what it was when it IPO’d, there’s still a lot of room to go down. To be clear, a low PS ratio means a) low growth potential and/or b) undervalued. A high PS ratio means the opposite. Here are some benchmarks of its competitors.

While these companies aren’t apples to apples, its worth noting that if SoFi’s long-term growth stalls, PS ratio could fall as low as 5, but probably not 2 unless there are some serious issues. Fintech is a crowded space and there’s a small window to prove profitability amidst slowing growth.

Customer Acquisition Cost: Here Be Dragons

The other main area that is concerning is SoFi’s incredibly high expense on Sales & Marketing. In Q32021, SoFi spent $115mm on Sales & Marketing against $272mm less $50mm in technology platform fees in net revenue, which equates to 51% of $222mm. SoFi added 377k new members in Q32021, which means they spent $588 / new customer. These numbers and any analysis regarding cost of customer acquisition are completely excluded from their Q3 earnings presentation.

Now, I’m sure the above numbers are not accurate, but I don’t think I can get enough information to determine whether or not its too high (it’s very high). Moreover some of these expenses could be one-time expenses that can’t be amortized over time. Some expenses could be fixed, such as the stadium naming rights, while others are variable, such as $15 referral fees and CPC advertising.

Since we (I) can’t really dig into the expense-side of things, we need to trust the company’s leadership. It is also my belief that SoFi is investing heavily in brand-marketing and, speaking from experience, it is very difficult to prove a causal relationship between decreasing cost of customer acquisition by increasing brand awareness.

If SoFi’s membership growth slows for their next earnings on March 1st, expect the stock to tank. As an investor though, slower growth in Q4 doesn’t worry me and I would probably add to my position. If, however, they slow again in Q1 after the federal student loan payment moratorium is lifted and the Super Bowl, it might be time to get out. A lot of companies go bankrupt trying to buy up customers in a heavily saturated market.

Focus on the Customer

SoFi owns the naming rights to SoFi stadium, the football stadium here in Los Angeles. Guess where the super bowl is? Guess who just became a bank? The largest annual television event in the US is being held at SoFi BANK stadium. That sounds like a big important company to me. I really hope SoFi marketing emphasizes they are bank. Chase Bank ($462bn market cap) is the name of the Warriors stadium. There are smaller banks that own naming rights to stadiums (not many), but SoFi Stadium is a global name and it’s hosting the super bowl. SoFi is (probably) the only bank that offers equity and crypto trading on an easy-to-use mobile app. I was able to sign up and get my first free stock in less than 1 minute.

After the Super Bowl, when people see an advertisement for SoFi Bank they are more likely to convert and create an account and when they create an account, they get a free stock. I love this product loop; sign people up quickly and give them something free that gets them hooked. Trading is much more engaging and leads to higher customer retention than lending products. By signing up more people to higher retaining product loops SoFi only needs to market its more profitable products internally.

The mobile app desperately needs Dark Mode. The UI is ok, but it’s not as good as Robinhood. Furthermore they should start offering options trading asap. Imagine being able to offer personal loans to r/wallstreetbets apes who lose money on credit making risky trades. Sounds terrible, but it’s a huge opportunity. It would be like if DraftKings became a bank and offered credit and personal loans to its customers, which they can hold on their own balance sheet. It’s not loan sharking if you’re a bank!

The Mobile App Converts Existing Customers

When you open up the SoFi app as an existing customer the home page provides enticing calls to action. Yes, I want a high yield banking account. I want 2% cashback on credit cards, and I’m sure a lot of people like tracking their credit score. All of these activities provide perceived value to the user, the products are features users will regularly engage, and the products are high value to SoFi. Here’s my homepage.

SoFi’s app provides more value to the user and itself than any of its other competitors. Venmo’s homepage is a feed of payments (no value, just amusement), CashApp is a calculator with a button for Pay and one for Request, RobinHood shows your investments (not something I want to look at right now), and PayPal wasn’t downloaded on my phone apparently.

In Summary

I like this stock and I bought it. I mainly bought shares because this doesn’t seem like a short-term play. I’ll continue to monitor the thesis laid out in this post, but there’s no point in timing an earnings release or some macro event. I believe this is a strong company that has the potential to 3-5x in a few years. I also bought a few call options expiring Jan 2023 at a $20 strike price.

SoFi is clearly executing its mantra, as the CEO puts it, “Selection, Fast, Content, Convenience, Better Together.” And just like it’s naming rights purchase of LA football stadium, SoFi is “making its footprint bigger than its foot”.

Predictions for 2022

I have a lot of optimism for 2022 and I don’t think I’m alone. 2021 was truly a rebounding year and while it sure did have its controversies, in general the world seemed to move past the largest black swan event in recent history.

I initially started writing this blog because I enjoy finding pockets of market euphoria where valuations disconnect from reality and begin to represent and alternative future. These pockets generally start with small niche communities whose hobbies and passions are thrust into the news cycle and bombarded with newcomers looking to get involved, make a buck, or just learn something new and cool. In 2017 it was crypto. In 2020/2021 it was r/wallstreetbets, options trading, and finally Meme stocks, which effectively killed the craze. While 2022 might be quiet and uninteresting from a euphoria point of view, it doesn’t mean interesting things won’t happen. Quite the opposite! In 2022 I’m looking to explore different technologies and ideas about what the future might look like. So, along those lines, here’s some predictions for 2022 in no particular order.

Big Tech Will Dominate Digital Experiences

Big Tech has the ability to make decisions and force users into using products and services at scale; consumers should not let them.

Contrary to the availability of the internet, individuals do not have many choices for online interactions. Having a community is important, but building a new one is very difficult. Consumers expect a certain ease of use and companies that gain any traction have to comply with data regulations. Twenty years ago, a single developer could launch a website and provide a brand new experience for consumers. Today, that website is not enough to gain any eyeballs, let alone attract the infamous Creators, who are the lifeblood of the next 5 years of the Internet.

Today, developers must build mobile first. They must have easy-to-use login features, such as integration with password managers and biometrics. Applications are expected to run bug-free. Developers must both track and analyze significant amounts of data to monitor quality and continually improve based on user feedback. User generated content must be censorable. Guess what type of people websites attract that host user content with no way to know who uploaded the content or how to identify what the content is? In order to even operate in a lot of countries, developers must both retain data for legal requirements and at the same time have the ability to completely destroy it for privacy compliance. Applications should be fast across entire countries; code must be served from multiple geographic zones to minimize latency. Services need transparent backups to flawlessly cover outages and restore service without the user noticing any downtime. Oh, and now there’s web3, which needs to be considered if you want any VC funding. Good luck doing all that in your basement.

While building new technologies is increasingly more difficult, it’s infinitely more useful. Big Tech has a lot of proprietary software hidden behind its immense walls that would be useful to any small software company looking to scale. There could be opportunity for new startups to fill this void, helping move some useful scaling logic outside walled gardens and making it work for new companies. Data governance and use control will be massively important for whatever ecosystem software is being built. Centralized support and services to mitigate risks users pose to any kind of online network can help scale alternatives to creating a digital identity.

I want to note that making proprietary code available for free is not easy. Code is written to solve business problems, so it’s natural a bit of business logic makes its way into the code base. Abstracting technical problems from business problems is tricky business and takes considerable effort and money. The world is indebted to those who contribute their time to build open source software.

Online or digital identities will soon be very important and ubiquitous. People need to stop worrying about ad targeting and start worrying about how companies authenticate real user behavior to keep us and our property safe. The core piece of an increasingly online economy is identity.

There Will Be Too Many Articles about NFTs, Web3, DeFi, AR/VR, and the Metaverse

NFTS: I think NFTs will be the main player in facilitating digital ownership. It makes sense that what used to be in app purchases can now be freely traded and sold among people even outside of the game or ecosystem in which the digital goods are created and used. Today, minting an NFT is complex and expensive. It shouldn’t be so; everyone knows this needs to improve. It’s probably an easy win for technologists. The winners could also get very rich.

I think the digital art craze will simmer. Then, after spending 2022 in detention, it will have a resurgence and enter the main stream. Digital art is not an ideal form factor for art in a home today, but it will be soon. I think the most important part about owning art is displaying it. You need a good wall, the correct lighting, and a frame that works for the piece of art. I think that’s pretty much it. Wow, I really know a lot about art!

Digital art is not easily produced but it is very easily reproduced. That is not true for physical art. And this is certainly not the difference between reading a book and reading a Kindle. It’s expensive and difficult to get a good digital art display. You effectively need to buy a very, very flat television. This new art installation will need a power source and I can guarantee you a power cord running from the floor to your digital art screen will look terrible (hint, you have to go in through the wall). Digital art does not look great on a television that is on all day. Televisions are not placed where art would be placed, so it looks odd to have your TV on all day playing a loop of a man made out of little beads running all day. Also, like NFTs, what a tremendous waste of energy. I can’t believe in the future someone will probably comment how much energy a piece of physical art has while consuming none. Seems as though we already have the formula for creating energy.

There will be a lot more digital art and digital artists. Creating digital art is a lot like creating electronic music. Artists buy digital art pieces like legos and then mash them together. Digital artists, such as Beeple, make art by buying existing 3d images, backgrounds and effects. These artists then use paid or open sourced software to alter these images, combine them, add effects across the entire piece of art, animate the images and even add sounds. While they do start with the proverbial blank canvas, they can now borrow the building blocks of art created by other artists to both speed up the creative process and create combinations and mash ups at very rapid pace. Just like electronic music, don’t expect this trend to go away and expect a lot more people getting into the digital art game. I wouldn’t be surprised to start seeing apps for kids to create digital art and even sell it to their friends and family by minting an NFT. Some rich private school will sell digital art created by students for a fundraiser this year. I’m not going to google it, but I wouldn’t be surprised if it already happened.

NFTs will NOT replace contracts. Contracts are complex and there are many venture capital graveyards of startups trying to automate parts of contract reading, writing, and enforcement. Abstracting away complex ownership structures and change of control mechanisms may seem like a fun problem for software engineers, but anyone who has been sued knows how important the exact wording of every clause can be for determining the enforcement of a contract. Software engineers rarely have detailed code reviews; that just won’t work for contracts. Sure, go ahead and attach the ownership of a contract to the signing entities. Even that isn’t always straight forward.

DeFi: There Will Be Regulation

Why can’t everyone be their own bank? You can, it’s called holding cash and giving cash to other people with the expectation they give you more than what you gave them later. Since the government has been slow to react to changing methods of exchange and storing value, fintech just decided to move forward. I should note that banks could not move forward because they are actually regulated. It makes absolutely zero sense to me that I give my crypto money to some company that would then lend it out or invest it in short term securities, which is a loose term in this situation. If the value of the crypto currency this Defi company is holding of mine decreasing in value, I have to put more in. If whatever this Defi company invests the money I’m holding in my account goes down, well, we’re not sure how to handle that yet. I prefer to invest in things that could in theory be articulated clearly. Owning part of a company makes sense. Owning a debt obligation, that makes sense. Owning a basket of stocks and debt, also makes sense. Defi is too much of the wild west. Yes, if all goes well, you could make 10-20% with the risk of losing it all. Or you could put all your money in Apple and make 10-20%. Apple is up 32% in 2021 and if it goes to $0 in 2022, the world is likely covered by a massive cloud of dust.

My guess is these Defi companies will either need to register as banks or be greatly restricted in what investment products they are allowed to offer non-accredited individuals. As regulations begin to take shape in 2022, I am optimistic blockchain technology will help reduce fees and friction of money transfer. Can we please get rid of $3 ACH transfer fees? Can we please just send US dollars to anyone in the world and have them pay the small fee associated with an FX transaction. It’s free to buy and sell parts of a company today. I should be able to electronically convert currency for free as well and send it wherever I damn well please.

Web3 Will Be in the News. You Can Ignore It

A bit of history: Web 1.0 is from 1991 – 2004 when web pages were static. In 2004 a slew of social media sites introduced Web 2.0, where regular people went from consumers to producers. These producers are now called creators (I’m really happy the term ‘Makers’ didn’t stick). Web 3.0 introduces the web backed blockchain technology. I don’t think anyone really understands it very well nor knows how it will play out. Imagine monthly subscriptions being replaced by NFTs (that bores even me). Websites will registered on blockchains and content can be distributed from peer to peer networks (this is how child porn is distributed today, in case you missed my reference earlier in this article). Both Jack Dorsey and Elon Musk think it’s all just hype. Decentralized social networks like Mastodon are generally ignored. Imagine going to a site that looked like Twitter.com, but there is no central developer; no one who ultimately is responsible for the impact of the site. If you’re wondering if this alternate reality actually comes to fruition, I trust the government will intervene appropriately. Also, I don’t see Web 3.0 every being easier to user than Web 2.0. It should also be noted that the failure Web 3.0 will not affect the Metaverse in the slightest.

AR, VR, and the Metaverse

Whatever your thoughts are on the Metaverse, it’s great for gaming. Nobody wants less immersive gaming experiences. Nobody wants worse graphics. Nobody wants boring experiences that don’t transport them to an exciting, thrilling, and fun new reality.

The development of the Metaverse will yield very useful tools, especially for medicine and education. The technology is cool. Snap previewed its new AR glasses for developers and they are very cool. You can go out in your backyard and be chased by Zombies. You can literally walk around the solar system. You can hunt for virtual goods in the real world and interact with them. Instead of scanning a QR code for a menu, you can tap your glasses and see an AR version of a menu right on the real table. Its just cool. It’s not going to take over your life.

The Metaverse and all its technology will not change your life, so stop freaking about not wanting to live in Ready Player One. The Metaverse will be accessible, open, and easy-to-use. While the most beneficial technology may be practically applied to medicine and education, it is being developed for the masses and should you choose to use it, like you choose to call someone on Zoom, it will be accessible and easy.

If you’re an early adopter, new gadgets will be fun to try out and likely expensive. Most won’t have a long life as battery life, they will struggle with local computing, and connectivity speed will be issues for the foreseeable future. If you are not an early adopter, it will be worth watching what Metaverse-like experiences people actually enjoy and find useful. Maybe the Quest 2 will have crazy daily retention and be used to connect people for gaming and social interactions. Maybe people will download Roblox and play casual, user-generated games with their friends. Maybe instead of watching live show on the television, we will attend digitally. Maybe Apple will release the iLife, which is a full immersive sterile room where humans will live out the rest of their lives hermetically sealed away from human contact. Also, in iLife, you won’t get targeted ads.

Think of the Metaverse as different entry points and experiences for living and interacting online. People will always want to represent themself. It may be genuine, or it may be aspirational. Either way, outfitting your digital avatar is going to be a huge business. People care deeply about their identity and wherever people represent themselves, you best believe they will pay to look good. Love it or hate it, there’s a lot of money somewhere out there in the Metaverse.

Stocks & Inflation

Stocks will go up. So will inflation. Savings is at a record high and as high inflation numbers continue to roll in, people will shift their money from cash to stocks. Expect reasonably high volatility, but don’t expect a return to Meme stocks. I’d put my money in cash-flowing assets with limited short and medium term debt expirations or cash requirements. Higher interest rates means its harder and more costly to borrow. This will limit expansion plans and these growth companies will turn to issuing equities. All of these things will lower future cash flows, hinder growth, and result in lower stock prices.

Generally when rates go up, so does profitable lending. For that reason, I’m investing in banking ETFs (VFH). Big Tech will keep going up as big tech companies have formidable moats and consistent sources of revenue. I wouldn’t worry too much about changing regulatory environments, what data can and cannot be used in advertising nor competition from, say, China. Keep buying and holding big tech.

Finally, keep buying and holding real estate. If rates go up, prices may come down. Also, they might not. In California real estate taxes are 1.2% of 100% of the value of your home while lending rates are 3-3.5% of 80% of the value of your home (whatever your loan amount is). So if you put down 20% and got a 3% mortgage rate, your real estate taxes are literally 50% of your total debt service. Raising rates may not impact prices that much. States could offer tax breaks and incentives in residential areas where lending is expensive, which could help offset any pricing drops in at-risk neighborhoods. Just an idea.

Finally, I don’t see a return to Meme stocks or even the r/wallstreetbets stocks that carried the market in 2020 and 2021. Stay far away from Kathie Wood’s Ark Funds as they come hurtling back down from the investing stratosphere. Buy stocks that have a good chance of actually making money one day. IPOs are not cash grabs any more. Braze, a recent tech IPO, is off 35% its IPO price and still falling.

Covid

I don’t really want to talk about it since it’s been politicized so much. Here’s what I do know: In 2022 I really hope people stop complaining about masks. Also, just ranting here, I don’t care if you don’t care about Covid. That doesn’t make you special, helpful or somehow mentally or physically stronger stating absolute fearlessness towards a virus. The official death toll is 5mm, but the Economist estimates the true number of deaths caused by Covid 19 is closer to 17mm. Not taking Covid seriously or allowing others to take it seriously only shows you can’t read the graph below. Well, my other theory is that a lot of humans do not value life while still holding on to the fear of death.

I can also predict in 2022, no one will read the Constitution. A lot of people are invoking the constitution to protect themselves against protecting themselves from this deadly virus. It takes 12 minutes to read and there’s nothing in there about vaccines. If you think concerns about Covid are overblown, you’re suffering from Availability Bias. That means you think your own brain is a better reference point than, say, Google, or a scientist. Or me!

One interesting thought experiment is to get a revolver. Pop in one bullet. Give it to a random person. Tell them to hold the revolver to their head. Then offer that person $1mm for every pull of the trigger. If they say no, then offer them $100 to point it at someone else. A lot of folks are going to pull that trigger. The issue is a lot of people don’t realize they are already pulling it.

Ok, end rant and back to 2022. Covid isn’t going anywhere, but it will get less deadly. New pills from Pfizer and Merck (RIP MRNA and NVAX) are not widely available today, but will be soon. These pills will dramatically reduce hospitalization and death rates allowing most of us to continue to get back to normal.

So that’s what’s on my mind today. It’s a slow week so maybe more to come.