Superpowers, Stories and Mining

Nate Crosby | Mar 4, 2022

The Superpower Never Changes or Fails

Whenever a new investor and I sit down to create an investment strategy, I always start by running a back-test and looking at their worst year. The general population of investors has no problem staying invested when the market is growing at 10% per year. It’s the worst years where mistakes will be made. Our brains are hardwired to spot danger and keep us alive. As a result, human beings are not born being great investors. We must teach ourselves to buy low and sell high. It takes discipline to either do nothing or continue to buy into a declining market. I feel like we are getting better at telling the story as none of our clients faltered in their investment strategies during the recent downturn. The discipline to stay the course is more important than the investments we add to your account.

Who would have guessed that in the two days following Russia’s invasion of Ukraine the stock market would finish up both days? Why would the market finish up while the world is in chaos? All along we have been discussing how the stock market’s decline since January 1st is largely due to two things: 1) unknown amount of interest rate hikes to come in 2022. 2) Federal Reserve tapering refers to the unwinding of massive purchases of Treasuries and mortgage-backed securities since the Covid-19 shutdowns. Perhaps the turmoil in Europe may lead some investors to believe the Federal Reserve will be less aggressive in raising interest rates because of the instability in Europe-bad news is good news. I’m more concerned with the investments we are in, not what is happening around them. Temporary chaos will drive stocks down but as long as they are meeting or beating expectations for earnings and growth they will continue to grow long term. Consider that the combined revenue exposure of the S&P 500 to Russia and Ukraine is about 1%. Our concern with the Russian/Ukraine invasion is humanitarian as lives are endangered and disrupted and much less about investing.

We may see oil and gas prices continue to rise. If that is the case our investment models have both energy and commodities exposure which would benefit from rising oil prices. A few weeks ago I stated that I thought the markets were oversold (too cheap). I stand by that statement with the understanding that an oversold market doesn’t mean everything is up from here. Markets can stay oversold for a period of time and the fact that we have had such a long run of growth in previous years, it doesn’t surprise me markets have been nervous in the face of uncertainty. We have positioned our strategies to expect more uncertainty and volatility. We presently have a higher gold and commodities position than we’ve ever had. We feel with an inflation rate of 7.5% and a choppy stock market this is prudent, but the key is we stay invested. The outcome of the rocky start to 2022 will ultimately end in growth. Run a back-test of the U.S. stock market from 1972 to the present. You can do so here. Point to every downturn that has ever occurred and see what happens in the resulting years. Patience is the long-term investor’s superpower. It has never changed or failed.

Telling your story -Carly Snyder, CAG Marketing

You’ve figured out your brand position & your personas are defined – now what? Generating demand is next on the list. What is demand generation anyway? For starters, it’s very different from generating leads. As the world moves away from generic email blasts to everyone in your CRM, we are changing the way we look at building the sales funnel. Lead generation tends to give you higher numbers – more clicks, subscribes, downloads – but doesn’t necessarily mean those people are actually interested in your product. Maybe they want a free piece of content or free shipping but they are not always bought into your story. Demand generation is a longer play and is centered around educating your audiences and ultimately getting them to request a meeting, ask for a demo, buy something. How do you get started? For those of you that caught our podcast last week, think about the buyer’s journey – awareness, consideration, decision, ongoing relationship – and map out what message/information your audiences need during each phase:

Awareness – determining the need
Consideration – evaluating their options
Decision – making a purchase
Ongoing relationship – building loyalty

You are well on your way to building your marketing plan! If you need help, don’t hesitate to reach out to me and I’d be happy to talk you through it!

Weekly Wisdom

“Faith is the art of holding onto things in spite of your changing mood and circumstances.”

-C. S. Lewis

I originally heard it slightly different in that commitment is doing what you said you were going to do long after the mood you said it in has left. It’s that grit that separates excellence from mediocrity. Vince Lombardi once said, “Fatigue makes cowards of us all.” It’s hard to drag your butt to the gym when you are tired. It’s hard to read that report when all you want to do is put your feet up and watch TV. It’s easy to stick to an investment strategy when everything we own is rising. We find our excellence when conditions are not ideal. We find excellence when the masses are capitulating. That’s not who we are.

Health and Wealth

Macy dives into the effects of screen time on your health and Nate explains why gold has been a store of value for thousands of years without legal tender laws. You can watch it here.

Picks and Shovels -Derek Ballinger

In fourth grade we learned about the California Gold Rush, the big takeaway is that nobody really got rich mining gold. The vast majority of people who made money during the era made money selling the supplies that prospectors used to mine the gold. The notable story is Levi Strauss who made riveted denim jeans, made a fortune during the gold rush without picking up a pickaxe. When investors discuss crypto, a “picks, and shovels” strategy is investing in technology that is needed for the cryptocurrency space. We discussed this strategy a while back on the podcast you can listen to that episode here.

That story we learned in fourth grade is missing a component that might be relevant if we are trying to compare the gold rush to the “crypto rush”. It is incorrect to say nobody got rich mining gold during the gold rush, but who got rich? Individual miners often spent days mining dirt, but organizations with resources and the ability to scale did in fact successfully mine gold and other minerals in the area. The problem was not that there wasn't gold, it's that just like many other things there are massive first-mover advantages, and economies of scale. All of the gains are made by the early adopters and the laggards are chasing what is already gone.

Bitcoin Derivatives

Certain stocks and investments can be seen as a bitcoin derivatives. A derivative is an investment that performs based on the performance of another underlying investment. Think of a mutual fund or ETF as a derivative of the underlying stocks in the fund. If you bought bitcoin after November of last year, my condolences to you because it has not been kind to any portfolio. So certain stocks that are seen as bitcoin derivatives have also performed poorly, stocks like Microstrategy have tracked the fall of bitcoin pretty closely because they hold a significant bitcoin position as a treasury asset (125,000 BTC+). The publicly traded bitcoin miners have actually fallen significantly more than the price of bitcoin because of how they use debt and how margins are impacted when the price of bitcoin drops.

Mining Companies

Marathon Digital Holdings is the most valuable publicly traded bitcoin miner with a market cap of 2.37B as of today. The stock traded close to $80 dollars a share last November and has fallen to $23 a share today. As a shareholder, it's not fun to watch these price drops when they are happening but if you are an investor in the company, today’s price doesn't matter because you do the homework to reap benefits years in the future.

Without getting too much in the technical side of bitcoin mining, there is a massive first-mover advantage, and also a massive incentive to mine in places with access to cheap electricity. Mining profits are a function of computing power called hash rate and mining difficulty. Mining difficulty just means, how many people are mining bitcoin at a given time. In the first days of bitcoin, anybody with a computer could mine bitcoin and receive potentially hundreds of Bitcoins every day believe it or not. The rewards would have been small in terms of USD but those who didn't convert them would be rich today. The difficulty of mining has increased significantly, and the successful miners need operations consisting of specialized computers with the sole purpose of mining bitcoin. The people/organizations who are going to be in the best position to mine bitcoin are those who locate in an area with cheap electricity and large amounts of capital to buy many specialized computers and generate enough profit to turn around and scale by buying more miners.

Institutional Money

Due to the regulatory framework, it's difficult for institutions to buy bitcoin because they have certain mandates that they cannot break on the threat of fines. If certain investments are not thoroughly regulated, institutions won't touch them. So without direct exposure to the asset, they look for derivatives such as mining companies. Blackrock, the world's largest asset manager with 7.3T assets under management purchased 6.5% of Marathon Digital Holdings and Vanguard purchased an 8.8% stake in the company last year. If we are in fact in the early stages of a large industry, Marathon Digital Holdings and other large miners are building infrastructure for immense profitability. If bitcoin does increase in price, small operation miners will have to continue to put up more and more capital to start because mining difficulty will keep increasing with large miners continuing to scale faster than small operations.

Disclaimer: Not a recommendation to buy bitcoin or bitcoin miners, these companies are often leveraged to expand operations and if the underlying asset falls they will be particularly vulnerable, do your own research and make sure this type of investment fits goals and risk objectives.

Appraisals for Jewelry

Many of you schedule jewelry on your homeowner’s policy. Often the insurance company will ask you to send in an appraisal so that they can list the value on the policy. Keep in mind gold has risen by 48% since 2017. There is a good chance your jewelry may be worth a lot more than when you first had it appraised. It is wise to make sure your coverage keeps pace with the value of the items you are insuring.

This newsletter is for informational purposes. Investing involves risk including the potential loss of principal. Understand all risks and fees before investing. Crosby Advisory Group, LLC is a registered investment advisor. CAG employees may own investments mentioned in this newsletter. Insurance products are sold and serviced through NMD Insurance.

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Superpowers, Stories and Mining