Stock Talk School: Digital Widgets

Join Chris Perras for the 3/26/2021 episode of Stock Talk!

Chris Perras: Good afternoon. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group here in Houston, Texas. Welcome to our March 26th, weekly Stock Talk Podcast: Keeping You Connected to Your Money. The S&P 500 continues to do its normal late first-quarter dead zone churn with the day-to-day macro topics taking spotlight over stock fundamentals in the future. One day, people are worried about interest rates. The next day, they’re worried about inflation. The day after that, it’s the new virus variant, and yesterday or the day before, I think it was the Democratic-controlled Congress plan for future spending and what tax rates will be.

I’m going to spend this week completely away from these topics and for the third time in three years, address the digital economy. This week’s podcast title; Digital widgets, Bitcoin, NFTs, and the Metaverse. At Oak Harvest, our primary clients and prospects are retirees and pre-retirees. Call it the demographic 55 years old and up, and for what it’s worth, I happen to be 55 years old myself. Many of our target audience are still getting a lot of their news and information flow from the TV, the radio, or maybe post-COVID, Facebook, Instagram, and Twitter, but believe it or not, a few of you still read physical books and newsletters, myself included.

These physical mediums of information distribution, broadcast TV, books, newspapers, radio, and even phone calls are becoming generationally obsolete. Why do I say that? Well, because the invention of the semiconductor in the 1970s and its mass adoption over the past 40 years has transformed our society largely from an analog and physical world that humans can touch and feel into a digital and cloud-based one that is based on ones and zeros.

Now, listeners, we may not like this trend and we may long for the good old days when we were younger, pre-connected devices everywhere in our life. Back when we used to carry cash in our wallets, and we were not expected to answer every text or every phone call in a few seconds or minutes lest we be thought to be dead or in a bad accident. Unfortunately, for those longing for those olden times, short of a massive EMP or electromagnetic pulse, wiping out all our electronics, those days are forever gone. This is where this podcast begins.

For the past three years at Oak Harvest, I’ve been asked about numerous topics surrounding the digital economy. The first topic I addressed was Bitcoin. I was asked, what is a Bitcoin? The only answer I could come up with at the time is it’s a digital widget mined by computers, much in the mold of gold being mined by big Caterpillar equipment is to baby boomers and many older investors.

Why did I call it a digital widget? Because that was the only phrase I could come up with that was broad enough to encompass all of its concepts. A digital widget was both broad and nebulous. You see, up until around 2016, maybe even 2017, I personally didn’t get it. I was generationally out of touch with what was really going on in the digital economy and the secular shifts taking place in the overall economy.

What do I exactly mean by this? Well, I’m lucky enough to have two great sons, both attending my alma mater Georgia Tech in Atlanta. The older one, who’s now 24 was a computer science major whose passion for years has been game development and game playing. The other son of mine is an industrial engineer. He wants to serve and protect his country, flying jets for the Navy.

When my older boy was in high school, even though he was a great athlete, I used to have to nag him daily, particularly during the summers, to get off his game console, get outside and go hang out with friends, get out and socialize with people. Once he turned 20 and he was away at school at Georgia Tech as freshman year, the light bulb went off in my head. You see, I couldn’t get in touch with him.

He didn’t answer phone calls for me. He didn’t respond to emails and I got zip in return from the texts I sent. Finally, when I was finally able to reach him, his response to me was that he didn’t see my texts or my emails. That he didn’t use those forms of communication. Even five years ago, he had already moved on to other forms of digital communication. He moved on to Discord, Twitch, Snapchat, Twitter, and occasionally Instagram, and guess what? At 24 years old, he was behaving 100% as a normal millennial and Gen Z borderline child because he falls into that border, who had grown up surrounded by technology and the internet his entire life.

Listeners, the first words out of his infant mouth weren’t dog or data or mama, it was buxs. It was buxs, B-U-X-S, as in Starbucks because that is where my wife and I used to go for Wi-Fi internet access on the weekend 24 years ago in San Francisco, where he was born. Fast forward to him being in high school. Every time he was logged on to a Sony PlayStation model, whatever it was back then, he was socializing. He was conversing. He was being entertained by his friends, some of which he had never met in person nor will ever meet face to face.

His community was the entire population of gamers playing whatever game he was playing at the time. Instead of playing basketball, four to six hours a day in 100-degree heat during the summer with four or five local friends like I did when I was 16, he was inside in a nice air-conditioned room, playing and conversing with 10, 20, 100 friends or more while they were playing multiplayer games. I didn’t know it back then, but he had a far larger community of friends than I could fathom.

Yes, video games have come a long way since Pong was launched in 1972. Listeners, the game Minecraft has over 600 million players in its metaverse. Fortnite has over 350 million players. That’s as big as the population of the entire United States, and World of Warcraft has over 100 million players. Think about those communities or metaverses as their own countries. These metaverses our collective shared spaces that integrate both physical players’ gaming with virtual goods and services in virtual communities.

Within these games they’re playing, players can buy both goods and services in digital form. Yes, you can buy a better sword or better armor to help defeat your opponents. For now, guess what you pay for those items? You don’t pay cash. You most likely get a direct charge to your debit or credit card of which Apple is most likely receiving 30% of every dollar you spend. That’s another story. For years I thought this was the most absurd thing I could ever imagine. Spending money on. Paying real hard-earned dollars for a digital good or service.

Yes. I said that’s just throwing money into the wind. You’re burning money. It sounded totally absurd to me right up until the point that I was eating dinner with a good friend of the family who confessed to having spent a few thousand dollars in online game purchases in the game Candy Crush in less than a year. When I asked, how in the world could they spend that much money? They calmly looked at me and said, Chris, how much money do you spend for coffee at Starbucks in every year? It’s no different. I defensively started to blurt out. No, it’s not, but I caught myself and I stopped myself because she was right.

The difference between paying for an online power booster or a more powerful weapon to defeat your opponent in a video game is no different than buying a cup of coffee at Starbucks. Do I need coffee? No. So why do I go to Starbucks a couple of days every week to overpay for a drink that literally ends up down the drain within two to three hours? Because it’s an experience. I enjoy it. I enjoy the taste of the coffee, even though it only lasts a few minutes and I value it as a getaway from the office during a difficult day. It’s entertainment for three to $4 per drink.

Listener, there really is no difference between the 150 million Gen Z and millennials purchasing digital assets and services online from the other 200 million of us who are older Americans, imbibing in whatever guilty, physical, or mental pleasures we have and were brought up on generationally. When I was younger, that guilty pleasure was a trip to McDonald’s every few days with my parents, which brings me to the latest news on the digital economy and it’s groundbreaking.

On March 11th, the digital artists known as Beeple sold an NFT, which is a non-fungible token, of a piece of his digital art through the auction house Christie’s for the mind-numbing price of $69 million. Yes, you heard that right. Almost $70 million. Until October of last year, Mike Winkelmann, who people know as Beeple, well, the most expensive piece of art he had ever sold was $100.

Now we can argue and discuss the merits of this purchase for years, much as we can argue about the economic value of a Van Gogh or that mako shark and acrylic box that hedge fund manager Steve Cohen bought years ago for over $5 million. What we can’t argue about is that this purchase just put the exclamation point on the future of this type of asset, for all an NFT is, a non-fungible token is a unique file that lives on a digital blockchain and verifies the ownership of a digital piece of art. Buyers get limited rights to display the art, so technically, they aren’t even buying the art. They’re just buying the directions leading to that art. They’re largely buying bragging rights to an asset that they may be able to sell at a later date. Now, Christie’s, the 255-year-old auction house that has sold its share of the most famous paintings in the world and in history led the auction and put its reputation forward to legitimize and accelerate this area of the digital world.

We witnessed the birth of the digital art world two weeks ago. Would I pay $600 or $6,000 for this piece of art? No. Maybe $600 but probably not $6,000 unless I knew I could sell it for $60,000, but the question isn’t if I would buy that art, the question is if someone in the future will pay that, for at age 55 I’m not the future. Hell, I’m not even the present given that the average age of Americans is 38 years old, and the average age of Americans is the answer to the question as to what is driving the economy and what direction the future holds, and that auction shows it’s an increasingly digital world and it isn’t slowing down.

I may not like everything about the digital world. It has made my life more convenient for sure. I don’t have to own physical books and records but it’s definitely less fulfilling in its depth. I mean is tweeting really a great way to communicate with people? 280 characters is pretty shallow, don’t you think? That’s not a lot of depth. You may never own a Bitcoin, may never want to own a piece of digital art like Mark Cuban, and you may never want to trust in any asset other than stocks, bonds, gold, and the US dollar, but as an investor, it’s best to understand where the economy and secular trends are heading and draft those trends, not where the trends used to be and where we wish they were.

What do they say in real estate? It’s best to own the worst house in the best neighborhood. It’s better than owning the best house in a bad neighborhood. To all my listeners say, 40 years and older with children, just as we adults know we’re not as dumb as our children think we are, they, our children are not as dumb as we think they are. Listen to them. Listen to what they say and watch what they’re doing in their spare time. Pay attention to what they value monetarily and time-wise. In those things, you’re most likely seeing the future of our economy in real-time.

While we don’t have to like all these things as adults, we can most likely learn a great deal about what will be the tailwind or headwind for our investments in the future by observing younger people and listening to what they’re saying and seeing what they’re doing. As for the markets, the investment team at Oak Harvest is already looking out to better position the portfolios for the second half of 2021. We’re looking for companies that investors should be looking at with a glass half full attitude come the second half of the year and into 2022.

Why? Because around July 4th and Labor Day of this year, investors will once again be looking forward. They’ll be looking out to the second half of this year and all of 2022, and what are they going to see? Well, they’re likely to see that higher secular growth companies that peaked all the way back in the third quarter of 2020 have stalled for over a year. Their valuations have compressed and now they’re starting to look cheap versus their long-term growth-free cash flow profiles. Big investors who’ve been chasing and pushing up value stocks since July or September of 2020 will start asking themselves, “Am I paying peak multiples for peak EPS in 2022 in these names?

At Oak Harvest, we are comprehensive long-term financial planners. What that means is as our client, you and your financial advisor should have a financial plan that is independent of the volatility of the stock markets. Give us a call at 281-822-1350. We are here to help you on your financial journey through life. God bless you your family and God bless America.

Speaker 2: All content contained within the Oak Harvest podcast expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you and nothing in this podcast should be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities.

Indexes such as the S&P 500 are not available for direct investment and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss and past performance is not indicative of future results.