Thread by @TheNorwegianNFT

𝑰𝒇 𝑾𝒂𝒓𝒓𝒆𝒏 𝑩𝒖𝒇𝒇𝒆𝒕𝒕 𝒘𝒆𝒓𝒆 𝒃𝒖𝒚𝒊𝒏𝒈 𝑵𝑭𝑻𝒔...

WARNING! Long thread
🧵👇

You have all heard of Warren Buffett.

"The Oracle of Omaha"
"The greatest investor of all time"

His track record is undeniable: between 1965 and 2020, Warren's investment company #BerkshireHathaway has yielded an avg. annual return of 20%, almost double that of the S&P 500.

But his success is not due to luck.

At age seven, he borrowed a book called "One Thousand Ways to Make $1000". He bought his first stock at age 11.

He went on to study economics at Colombia under Ben Graham, and he was the first student to receive an A+ in Graham's class

Graham, known as the godfather of value investing, in addition to the lesser known (but equally legendary investor) Phil Fisher, greatly inspired Buffett's investment philosophy.

Buffett himself says his style was 85 % influenced by Graham and 15 % influenced by Fisher.

But what is value investing??

Value investing is about finding securities whose prices are unjustifiably low based on their instrinsic worth. Rather than focus on short term supply and demand intricacies of the market, look at the company as a whole.

@Investopedia def 👇

According to @Schroders, "Value investing is the art of buying stocks which trade at a significant discount to their intrinsic value."

Now, what is "instrinsic value"? How do you find a "fair price"?

My previous employer, a top tier Nordic asset manager, had a value bias. Their portf. managers assessed companies' profits, EPS growth, P/E and P/B multiples, talked to the management

and studied the companies' balance sheets, income statements, and really dissected the "fundamentals" of a company. If it had good profitability, a good business model, good management, and a unjustifiably low prices, they might initiate a trade.

Without knowing every facet of value investing, that is much of the essence: to find a good asset that trades at a unjustifiable low price. It's to look at fundamentals and not just at future growth ("hype"), to value dividends now higher than dividends in 10 years. You get it.

The school of value investing GREATLY inspired Warren Buffett and is arguably the biggest influential factor as to why he got so successful.

(BTW: Everyone should read www8.gsb.columbia.edu/articles/colum… This investment style is not about luck)

Buffett is quoted saying:
”Look at stocks as parts of businesses. Ask yourself, ”How would I feel if the Stock Exchange was closing tomorrow for the next three years? If I am happy owning the stock under that circumstance, I am happy with the business."

"Rule no. 1: Never lose money. Rule no. 2: Never forget rule number 1."

"Price is what you pay. Value is what you get"

"The three most important words in investing are margin of safety. That means to buy stuff on sale"

"Don't try to predict the future, prepare for it"

Now, zooming back in on what this thread is all about:

If Warren Buffett was born 60 years later,
If Warren Buffett were buying NFTs,
What would he do?

𝑾𝒉𝒂𝒕 𝒘𝒐𝒖𝒍𝒅 𝒉𝒆 𝒃𝒖𝒚?

How can one apply Buffett's principles to NFTs - one of the most speculative assets on earth?

Applying the principles of traditional investing (and specifically value investing) on #NFTs is not easy, but it is doable: the thought process and reasoning have many similarities.

Now, in order to compare a stock (ownership of an actual business) with NFTs, what are really NFTs?

"An NFT is a purchased token ID within a contract residing on the blockchain. That part is immutable. Beyond that, you gain access the metadata which points to some artwork.

So other than the right to the metadata and an image file that can be copy and pasted ad infinitum, what else do you get with your Token ID? Often times, you get access to a community, but often those are open communities anyway, so unless the community is private,

you aren't really getting that either. This is where NFT projects look for adding on: staking, ERC-20 tokenization, companion NFT, expansion NFT, DAO (although most aren't), community wallets, metaverse, gaming integrations, 4K images, etc."

Quote from @CmpleteAsshole 🔥👏

In a nutshell: an NFT grants you ownership rights to an image that is part of a collection that is part of a commuinity that is part of a project that is a quasi-business. That business will get profits, which indirectly MAY benefit the NFT holders. Or it may not.

So in a sense an NFT grants you "ownership rights to a project", just like a stock grants you "ownership rights to a business", but you are not entitled to a % of the project's profits.

But NFTs are similar to stocks in that they trade on an exchange, they are subject

to price speculation, investor behavior (and biases), and that they might have some fundamental value, e.g. by giving you access to exclusive events, mints, other holder benefits.

But how do you find the P/E multiple? You know the NFT's price (P), but how do you find the earnings (E)?

Let's use @BoredApeYC as an example:

The current price is 111E ($371k) and BAYC's profits is the project's volume multipled with the royalties (5%). BAYC has traded 484k $ETH since inception. Let's assume it's been 1 year, and let's assume they will manage to hit 500k volume the year.

$ETH 500k * 5% royalties equals $ETH 25k, or $82m in profits. If every #BAYC holder gets a proportionate share of the companies' profits, it has to be dividied by 10,000 apes = 2.5E per ape.

111/2.5 = 44.4.

But this assumes @yugalabs, their employees, partners work for free

What is the team allocation for $APE then? The BAYC founders gets 8 percent (!). An additional 16% of the supply is held for Yuga team and charities, account to almost 1/4 of the total $APE supply.

Hence, to believe even 3-4% of the BAYC royalties will go back to the owners

is an utopy. But let's assume 2.5 percent of all the royalties within BAYC ecosystem goes back to the "shareholders" (the ape owners).

2.5E per ape is now effectively 1.25E per ape, and the "adjusted P/E multiple" is around 88.

Doesn't seem like something Buffett would buy...

HOWEVER, looking at P/E numbers for an NFT project is a waste of time: NFTs cannot be compared to stocks in that regard.

Because in essence, with NFTs you do NOT own a piece of a company, you are NOT entitled to profits that company/project generate,

and you are NOT getting anything beside your image, apart from some “utility” the project’s team may or may not grant you.

Well, then how do we find a “margin of safety” when E is basically useless? 🤔

Well, one thing you can control is the price (P). If you buy into a cheap project you are risking less of your overall portfolio. The lower the collection’s price (everything else equal), the higher your margin of safety. This seems to be in contrast with how many people operate

or trade in the market today, thinking “the higher the price, the higher the value”.

Remember, price ≠ value.

Now, considering there are no balance sheets, no income statements, how do you find the an NFT's fundamentals? How do you assess a project’s “intrinsic value”?

𝑻𝑯𝑨𝑻 𝒊𝒔 𝒕𝒉𝒆 𝒎𝒊𝒍𝒍𝒊𝒐𝒏 𝒅𝒐𝒍𝒍𝒂𝒓 𝒒𝒖𝒆𝒔𝒕𝒊𝒐𝒏.

𝑻𝑯𝑨𝑻 𝒊𝒔 𝒘𝒉𝒂𝒕 𝑾𝒂𝒓𝒓𝒆𝒏 𝑩𝒖𝒇𝒇𝒆𝒕𝒕 𝒘𝒐𝒖𝒍𝒅 𝒉𝒂𝒗𝒆 𝒂𝒔𝒌𝒆𝒅.

What are some “tangible” value indicators?
What is an NFTs fundamentals?

What would you be comfortable owning for years?
What would you be comfortable owning, despite heavy price fluctuations?

In my opinion, there are some obvious fundamentals when examining an NFT project. Let’s dive deeper into some of them.

1) The artwork. If the artwork is great, the project has better chances long-term.

2) The artist. A world-leading artist with a big real-world following will have greatest chances succeeding over time than a lesser known artist.

3) The team. If Meta, Twitter, Apple, or a big corporation were to launch an NFT collection, it would have better chances

(due to the human capital and expertise within those companies) than your neighbor launching his own NFT project. The team can also be blockchain wizards, leading developers, great designers, great marketers, etc.

4) Historical significance. Look for projects with historical significance. Projects that were first (or among the first) of its kind. There will be no more early NFTs: that supply is fixed. It will never increase, opposed to the overall NFT market that is expected to grow by

10x in just a year or two. Rank historical NFTs with a greater emotional appeal higher than historical NFTs with a lesser emotional appeal. What does the market value, and in what direction is the market gravitating towards? If that answer is sports NFTs,

then find the first sports NFTs. If that answer is digital avatar (PFP) collections, then look for the first PFP collections. If that answer is trading cards, then find the first examples of digital trading cards.

5) The price. Whether a project “scores” on all these parameters is irrelevant if the price is too high. Remember, value investing is not about finding great projects “regardless of price”. Value investing is about finding those with an “unjustifiable” low price.

I’ve been in the NFT market for almost 1 year now. One thing I’ve learnt is that narratives change, sentiments change, and that people (and teams) make mistakes. We’re humans, we make mistakes. But just as Buffett doesn’t buy into a company just because it’s management is good,

you too shouldn’t buy into a project just because the team is good. It must be more.

I have seen (and been involved with) many projects that were deemed the “next blue chip”, only before some big blunders were made by the team, resulting in massive FUD within the

"once-so-vibrant community", resulting again in an extreme price collapse. If a project creates a lot of hype, positivity and joy, prepare for the day when that stops. Would you be comfortable owning the project if the lead developer were to quit?

I am confident Warren Buffett (or Berkshire Hathaway) never bought a stock simply because “they loved the management” or “the community”. That could make them want to accept a P/E 12 company instead of a P/E 10, but it would never make them buy a P/E 50 company.

In contrast: the artwork, the artist, and the historical significance of an NFT project is immutable. Those will never change over time.

People’s perception of it may change, however…
Imagine an artist/developer with a certain political view, that was once was “acceptable” but not is now (Brantly/ENS?).
Or an artist that has done things in his/her past that is now deemed highly unmoral (Jungle Freaks),

or it gets proven that the artist has taken/stolen inspiration from another artist (Crypto Chicks).

I think we should all come to terms with the fact that humans make mistakes, so naturally artists make mistakes too. Seeing how vicious/powerful social media can be at times,

betting on an artist alone would probably not be the best strategy either – even if the artist’s name is Takashi Murakami.

Artwork:
Although the artwork is immutable (and will never change) imagine how many NFT collections that will be launched over the next few years with JUST as cool (perhaps even better) art.

The NFT market is growing exponentially, and so is the supply,

and every year there will be launched “great art collections” made by big corporations in collaborations with some of the world’s best artists. Personally, I like Doodles’ art, Cool Cats, Quirkies and more, but will those collections be considered

“good art collections” in 5 years? I’m not so sure.

This leads us to “Historical significance”.

Whereas people may value history differently, a project’s contract or launch date is written in stone. It can never be changed

So although “historical NFTs” may be subject to market cycles and trends (just like anime or derivative art) is it likely that this category of NFTs will become more valuable over the next 10 years? Is it likely that the first NFTs deployed on the blockchain

will be highly sought after in 50 years? Is it likely that the first PFP collections of all time will be highly desirable collector items? In my opinion, this is just not likely, this is certain.

Early NFT projects/Historical NFTs is in my opinion the only “fundamental value factor” that for CERTAIN will increase over time.

An asset’s price is a function of supply and demand. With a growing demand (both due to user growth and the fact that history becomes more appreciated over time) COMBINED with a low/finite supply, historical artifacts will be highly desirable collector items.

Great art will still be great art in 10 years, but will today’s “Great art projects” be viewed as “Great art projects” in 2040? I’m not so sure…

As the market grows, there’s more money on the line, and things will become more professionalized. New project’s budgets will be

higher, the teams more professional, and the art even better.

So although “artwork” is one of the most important fundamentals in an NFT project, an investment shouldn’t be based on that alone.

That is, unless you buy if for your own personal benefit (framing it digitally in your living room, comfortable owning it for years to come, being indifferent of short term price fluctuations).

𝑻𝒊𝒎𝒆 𝒕𝒐 𝒄𝒐𝒏𝒄𝒍𝒖𝒅𝒆 𝒕𝒉𝒊𝒔 𝒍𝒐𝒏𝒈 𝒕𝒉𝒓𝒆𝒂𝒅.

If Warren Buffett were buying NFTs, applying the principles of value investing, he would look for NFTs with a high value-to-price-ratio. Value fundamentals could be, but is not limited to, great artwork,

great artists, great teams and leadership, historically significant NFTs and other factors.

Warren Buffet wants to buy projects with a high margin of safety, and considering that those “value factor” is quite hard to assess, he probably would have steered away of

the so-called “blue chips”. Yes, they are great projects, but are they trading at an unjustifiably low price? Probably not.

Warren would want to buy NFTs for the long run – not to trade them the next month. He would want to buy NFTs that is almost “certain” to increase over time

even if that is 3 or 7 years from now.

He would acknowledge that narratives change. He would’ve remembered the fallen angels in his investment career, he would have remembered the downfall of Nokia and Blockbuster, the change in sector distribution of the S&P 500 the last 40

years, and he would have known that market leaders TODAY seldom are market leaders in 20 years.

Buffett would understand that Historical NFTs, that is first movers, or projects that were among the first of its kind, would likely be more appreciated over time.

He would be fine waiting 5 years. He would be extra keen to own those projects if they had good leadership (team) and a good business model or a good product (holder utility could be business model; pfp projects could be a good/appealing product).

He would prefer to buy projects with a relatively low price, considering he then would have better chances obtaining a margin of safety.

𝑾𝒂𝒇𝒇𝒆𝒏 𝑩𝒖𝒇𝒇𝒆𝒕𝒕 𝒊𝒔 𝒏𝒐𝒕 𝒃𝒖𝒚𝒊𝒏𝒈 𝑵𝑭𝑻𝒔.

But if he was, this is what (I believe) he would have done.

If you like threads like this, please consider liking and sharing the first tweet:

Thank you! 🙏❤️

https://twitter.com/TheNorwegianNFT/status/1511693554204217347?s=20&t=0m_wODfAeAYtJUSEBObsuA