AOTB Mini-series

Warren Buffett began his investing career following the advice of Benjamin Graham. The notion was simple enough: find companies so cheap that even if they went out of business, the sale of their assets (at liquidation) would still earn you money.

Buffett called this the “cigar butt” model of investing. To explain the metaphor, he thought of himself as a poor man in search of “cigars” (i.e. companies) that weren’t totally spent yet and he could get a few extra puffs off them (i.e. nice percentage return) before they were.

Alas, the trepidation around stocks, post-great depression, is decades past. That is why, later in his career, Buffett changed his thinking from this “cigar butt” model to undervalued growth companies with long-term competitive advantages (which he calls a “moat”). He still likes the idea though.

In a similar way, Joel Greenblatt describes his own bargain model of hunting for spinoff stocks in his book You Can Be a Stock Market Genius (this is in Greenblatt’s first book that’s mostly only intelligible to other hedge fund managers–but I liked it).

The idea with spinoffs is that, unlike companies that IPO their stocks to much fanfare and publicity, when a larger company spins off a smaller one there is no such similar publicity campaign. Usually, the smaller company is loaded up with debt and not exactly in the same industry.

As a result, there is a great deal of selling pressure as institutional investors unload a company that isn’t in their area of focus and who don’t like the new debt burden. But, if these new companies do survive, you can make massive returns.

In fact, Greenblatt found that if you just bought all such spinoffs, you’d likely make 20% a year. And if you were selective about them–and this is what his hedge fund Gotham Capital did in the 1990s to make 50% a year for the whole decade–then you could get significantly better returns.

Here’s the idea of this lesson. What exists in the crypto-currency world that’s similar? Since everything in the crypto world just makes a lot more than stocks, would this work even better?

My proposal is that you can find such bargains with “post-launch” coins.

How You Can Leverage Late Launch Cryptos

Let me give you a picture. Here’s JasmyCoin (JSMY).

This is its short history as listed on Coinbase and you can see that it massively pumped for a bit, and then dumped. This is a familiar pattern for anyone watching such projects.

The pre-launch strategy is to get in before the pump and flip. I described how you might pursue that one way here.

The present article is concerned with the other side of that strategy: post-launch bargains. I have a running list of pre-launch and post-launch coins for my coaching clients. And I’ll drop some of these from my watch list into the crypto-rider channel.

Everyone can learn how to use this strategy though, so I thought it worth outlining here. Let’s start with the obvious stuff.

1 The Big Difference

Unlike stocks, cryptocurrencies don’t have established methods for their valuation. Just so we’re all on the same page:

• Here’s the free lesson on how to value a stock (from TheArtofTheBubble.com).
• Here’s the discussion of the methods for valuing a cryptocurrency (also from AOTB).

What this means is that bargain hunting is going to be quite a bit different in the cryptocurrency world than in the stock world.

For what follows, then, the background approach of AOTB is assumed. This means, basically, that the basic economic cycle indicator is at least a yellow 3 (moderate health), and that the industry health of cryptos (as measured by momentum analysis on lead indicators) is at least a yellow 3.

• For reference, I explain the broader idea of the approach here.

What You Need to Remember About Late Launch Cryptos

The point is one that holds for stocks and cryptos alike: if the macroeconomy is terrible, then nothing does well. If the industry is in cyclical decline, then nothing does well.

Instead of using typical metrics for identifying undervalued stocks (price to earnings, or EV/EBITDA, etc.), we’ll be thinking about these coins like a venture capitalist.

2 A Basic VC Checklist

Venture capital only exists because traditional banking can’t finance it. If you are the tech lead for a revolutionary bit of new software, you can’t go to a bank and get financing to hire some more software engineers. Why? Because if you fail, then the bank can only repossess code.

Tech firms, in short, have no assets and so cannot qualify for traditional banking loans.

VC firms approach the matter differently. They have a strategy of focus and look to gather up a basket of projects. They know that several of those will fail–maybe even most. Their model, however, is designed to make money provided the winners win by enough. This tilts their analysis in a very specific direction.

Questions for VC Firms Regarding Late Launch Cryptos

Instead of looking for assets to repossess, the first question for a VC firm is how large the addressable market share can be. At base, this is the fundamental question for the quality of the idea.

• Is there a proven use case for the project?
• How large is that user base and how certain can we be about that?
• Notably, disruptive tech fares best because it is replacing an existing market and so the use case is both well-known and easily measured.

The initial screening might further review:

• How well prepared is the white paper? Look at Jack Dorsey’s TBDex white paper. This is the gold standard for how a white paper should look. It is technical, without getting bogged down in the mathematics of the project. And it is professionally presented.
• Can this project actually be realized? Why haven’t others done it?
• How does it deal with commonly known attacks, flaws, or problems?

After the initial screen, the VC firm wants to know how much of that market share the project under consideration can reasonably capture–and over what timeframe. Some questions they’ll consider are:

• What’s the architecture of the project look like? It is simple enough? Does it make sense?
• Is the project just a matter of coding and launching a coin, or will it additionally involve the manufacture of equipment or its installation (say by kiosks)?
• Finally, even if a userbase exists, is that user base sophisticated enough to work with cryptocurrencies? Gamer’s adopting NFTs, for example, is easy, but the average public member isn’t there yet.

After these points–which test the quality of the idea itself–the firm might want to know whether the team have the people to pull it off. Do they have the resources …

• Technologically? Who are the active developers?
• Legally? Who do they have to sort out the needed agreements?
• Promotionally? Have they at least partnered with someone?
• Financially? What capital has already been committed?

If the project is a pre-launch coin, then the firm will check such items as:

• What are the tokenomics of the project?
• Will an early investor face massive coin dilution?
• What will incentives long-term holding?
• What are the vesting periods?

If the project has already launched, then the firm will want to know: How well is the project faring?

• What are the number of GitHub lines?
• How many active commits a month?
• Is it coded well and how easy will it be for other developers to use that code?
• Is the company hitting its milestones?
• How is the publicity campaign faring?

This is just a rough outline of the main ideas that a VC firm looks at. Some of the points require a fair amount of expertise to determine–such as Github analysis and coding review. Obviously, my team will give subscribers the information they need for that.

But not all the questions are really that technical. For the most part, it’s about a 2-hour research review checklist.

Concluding Thoughts

What you are looking for, to recall, is a coin that has launched, rocketed off and then crashed back down. If it still looks like a good coin, then you might have a nice “cigar butt” crypto for your portfolio.

What about Jasmy? Are they any good?

Well, they’re still on my token watchlist, but I worry a little about them. Here’s why. This is their information update list from their site (originally in Japanese).

If you blow that image up, you’ll see that the last update on that webpage was in April of 2021. They are not active–at least not on their online presence.

So, right now, I’ll pass on JSMY.

That took 15 minutes to find. Could you do that? Probably.

I’ll bring projects to subscribers that I do think work out and which do require technical vetting. If you have any such proposals, either reach out to me or find @Bachelor_Phil on our Discord server and ask about a review for a proposal.

But even if you don’t pay for the subscription, I hope this lesson will be useful to you. A lot of this activity is just about having organized common sense.

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This week I wrote a number of pieces that are related to this post, so you might want to have a look if you’ve missed them.

That’s it for this week. Remember to join us on Discord if you haven’t already.

Happy Trading!!

Disclaimers

General financial disclaimer: This post is provided for entertainment purposes only. I am not giving you financial advice and I am not a financial advisor. You should expect no financial returns one way or another based on my statements. These points hold equally for any statements that could be attributed to The Art of The Bubble or any related business entities. If you decide to buy or invest in anything, then your returns and potential losses are your own. No statements about taxation are taxable advice and you are encouraged to consult your own tax professional. You are also encouraged to do your own due diligence before investing in anything.

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