- Small value was and continues to be good
- Retail & institutional investors memed
- DeFi & Web3 defined the year
- Experimenting with Web3
- Crypto startups & DAOs are new growth vehicles
Small Cap Value
Small-cap value stocks were compelling before the pandemic, but the drawdown they experienced in March 2020 made them too attractive to ignore. AVUV, my preferred small-cap value ETF, saw a drawdown of -42% compared to the -20% SPY experienced. Since then, AVUV has returned 180% compared to SPY’s 105% or QQQ’s 132%. But the narrative remains unchanged despite the outperformance. Small-cap value is still a sleeping giant for many reasons, but the following charts help put things into perspective.
the value spread is wider than ever...
meanwhile, only a handful of tech companies account for all of the returns in the S&P 500. There’s no telling what 2022 will bring. But like Cathie Wood says, I love this setup!
I believe this number is higher than her previous estimates. 40% annual over the next five years is a lot to ask at current valuations. I didn’t like ARK this year and don’t think that’ll change in 2022.
These charts are cherry-picked to prove my point: the chances that ARK repeats another 2020 is low.
Cathie Wood wasn’t the only one with bad 2021 returns. Many pandemic stocks got a reality check in this year, but meme names like GME and AMC found new life. They’re still up 780% and 1,300% respectively.
Retail & Institutional Memes
I underestimated the power of memes when the year started. Everything that happened with Gamestop and AMC made sense, but I didn’t expect it to be sustained for as long as it has. I was very proud of the degree of coordination “random internet strangers” could accomplish despite being on the losing side of this wave. Memes were powerful in 2021!
And when archegos blew up, it was clear that the institutions were also meme-ing in the shadows. The moment was fleeting for the financial world, but it defined most of my 2021. Archegos blowing up made me realize just how scary our closed financial system is with cracks and duct tape holding most of it together. I’m glad it was contained, but the fact that a handful of bankers knew what was happening behind the scenes while everyone else was oblivious to the immense amount of leverage being deployed via swaps was hella scary.
Not long after Archegos, the market saw a significant drawdown in May, this time, with cryptocurrencies. Many people fled, but this event answered some of the questions many traditional stock investors and I had about the crypto markets.
Juxtaposed with Archegos, the event unfolded in public for everyone to witness or partake in. All market participants could get a sense of just how much leverage was in the system in real time, and people could bid on discounted assets from liquidated accounts. Not all market participants need to care about liquidations, but all deserve crypto’s transparency.
DeFi → Web3
Though I’ve been in crypto since 2017, I didn’t take it seriously till the Archegos event. I call it my red-pill moment for DeFi. I played around with compound & other protocols last year, but in 2021, DeFi became my primary source for saving, borrowing, and lending. 10%? 50%? or 1,000,000% APY? Where else will you find people deploying millions of dollars into memes? Unfortunately, I wasn’t a total degen, no matter how hard I tried.
The higher returns were due to better efficiencies and more fluidity, but also regulatory and smart contract risks (bugs/hacks). But you could cover your positions with a 1-2% premium — an insignificant sum in the DeFi world, though doing this limited the number of protocols you can participate in.
It started with Friends With Benefits, a DAO I heard about on a podcast. I looked into it and immediately dismissed it as a scam. Then I heard about it again and decided to dig deeper. I remember thinking “what if the name is meant to be the first filter?”
For me, FWB wasn’t an investment. I was experimenting and trying out web3 things, and the DAO stuff seemed intriguing. Little did I know that FWB would turn out to be the best investment I made in 2021. This isn’t about the tokens' returns since I bought them. If that were the case, I would have sold them around 50x after a16z invested in the community.
FWB is the backbone of my web3 network. The other DAOs I’m involved in are somehow linked to someone I met at an IRL FWB hangout. Who knew that showing up and whispering “friends with benefits?” to a bunch of strangers would lead to this?
It’s been wild! But what’s the end game here? What’s a small-value investor, and a vocal skeptic of ARK’s approach to disruptive innovation, doing in crypto? How can I buy ETH when I think many growth stocks are overvalued?
Could we really have more fun and more money? Could we have very liquid work structures? How likely is it that web3 will be relevant five or ten years from now? It sounds too good to be true, and I’d be retired if I had the answers, but could it work?
I love running experiments, and web3 has a collection of them running simultaneously. Many will fail, but they are just too fun to ignore. Communities are primarily interested in experimenting, and my bet is that a handful of those experiments will be successful. The successful experiments will lay the groundwork for the next phase of the digital revolution.
Web2 companies are now incumbents. Crypto startups and DAOs are the new growth vehicles.
There’s definitely a ton of hype, and I don’t think all of it is well placed. NFTs, for example, are really freaking innovative. But 99% of pfp projects will end up at $0. It’s like having a tank and deciding to shoot a 9mm pistol through the hatch instead. All technologies go through the speculative phase, and speculators finance the builders that create permanent infrastructure. While most worry about the speculators, it is wiser to focus on the builders and their experiments.
I’ve been investing in web3 founders and startups in addition to the DeFi/NFT/degen stuff. This is also fun due to the lack of an established playbook. Some require me to fill out legal documents, but for others?
- I send them USDC/ETH and DM the transaction id on discord
- They send me back my allocation in the form of their DAO/startup tokens
No, it really was this easy for a couple of my investments. The entire contract is covered by the two transactions, and smart contracts handle scenarios with lockups and custom vesting. If this isn’t the future, then 🤷🏾♂️. I decided to go full-time web3 because it’s been a ton of fun learning new things and meeting intelligent people.
The internet is worth exploring again, thanks to web3!
If you’d like to keep up with my journey exploring the new frontier, make sure you’re subscribed. Thank you all for reading and asking questions all year long. To the premium members, thanks for believing in me!
Hope you enjoyed the blog in 2021. I’m excited for what 2022 has in store.