Lately, I’ve been thinking about the tokenization of assets.

I highlighted this trend in a previous newsletter [see Otis from September 2019], but the explosion of day traders in the U.S. stock market has me thinking about it in a new way.

You see, I have been bullish about what the digitization and securitization of non-traditional assets might mean for creatives globally, and EM in general — think of the possibilities for inclusive wealth creation in capital-light, culture-rich verticals and markets.

But I hadn’t considered how it impacts the psychology of investing.

Take a look at the Cash App, for example (disclosure: position in Square). The Cash App is but one example of technology democratizing access to financial markets.

In the Cash App, users can frictionlessly transfer money and trade stocks or bitcoin. In addition, users can purchase fractions of shares that they may not be able to afford otherwise (e.g., Apple, Mastercard).

The insight on investor psychology comes from the user interface and how it gamifies the process of ‘investing’.

Take a look:

Screen Shot 2020-07-22 at 3.20.01 PM

The logos of the most-traded and biggest-daily movers are presented like pennants at a horse race, highlighting two of the speculator’s best frenemies: volume and volatility.

There’s even a digital (picture) book to teach users about investing.

When you click on a company — say, Apple (no position) — the historical share price performance is presented with a soft, rounded line, evoking a languorous drive through the Tuscan hills.

There’s a brief snippet about what the company does, and three data points: number of employees, share price, and company value (market cap).

Screen Shot 2020-07-22 at 12.27.51 PM

There are no fundamentals that traditional investors might wish to know, such as revenues or earnings, to say nothing of operational or financial performance metrics.

The share is the thing. Not the business.

The logo. Not the cash flow.

When I talk to day traders about the stocks they’re playing, they talk about shares like my friends and I yammered about baseball cards on the playground.

Back then, we’d reference an issue of Beckett to ascertain a card’s dollar value. Nevertheless, there was an emergent consensus on the cards that had value and those that did not — quality players, quality cardstock.

If there was a disagreement over a card’s value, the players’ stats were displayed on the back, enabling a fundamental comparison of their skills.

But I find that with day traders, the market value is irrelevant. What matters are movement and momentum.

“What does the company do? How does it make money? Is it profitable?” I ask.

🤷   “It’s up 30%.”

A friend played the Tech Bubble 20 years ago and his strategy was simple: buy the shares of companies whose TV commercials he didn’t understand (CSCO was a big one).

He made a mint. Until it all evaporated.

It may be the nostalgia, but his approach seems to have more rigor than that of the Stonks crowd.

A few weeks ago, I was reading a book on the beach when three inebriated bros walked up to me.

Talkative Bro: What book are you reading?
Me: Trade Wars Are Class Wars.
TB: Is it about stocks?
M: No.
TB: What’s it about?
M: International trade.
TB: Like business?
M: Like business.
TB: Do you trade stocks?
M: Sometimes.
TB: Me too.
M: Wow, man.

For as long as I can remember, nobody has ever come up to me on the beach to ask what I’m reading.

And to ask if it’s about stocks?

I ask you, who among us will be the last marginal buyer?

A part of me worries that when the speculative frenzy fizzles and fades, its death may suppress individuals’ appetite to invest in tokenized assets.

But then, when I fire up the PlayStation to crush some CoD Warzone — 60m+ downloads in its first 60 days — I see legions of people paying real money to equip their virtual avatars with outfits and weapon skins.

Tokenization and e-assets are just getting started.

Stay strong, y’all, and hold the center.

Alla prossima,

Ludovic Phalippou

This wealth transfer might be one of the largest in the history of modern finance: from a few hundred million pension scheme members (plus Endowments, Sovereign Wealth Funds, Family offices, etc.) to a few thousand people working in private equity.

Love him or hate him, Oxford professor Ludovic Phalippou throws heat.

His latest paper, “An Inconvenient Fact: Private Equity Returns & The Billionaire Factory” raises the BS flag on the performance of U.S. private equity funds. You should read it.

I was chuckling in my coffee reading some of the large buyout firms’ responses.


Because I remember watching one of KKR’s senior leaders give a presentation to a room full of LPs. And when he displayed a slide showing the franchise’s track record, there was a footnote — hard to see if you weren’t near the screen — stating that the performance excluded write-offs (i.e., Kodak).


But there’s a bigger point here that Ludovic is right to point out — that the stickiness of since-inception IRRs distorts the flow of capital in a way that is harmful for EM:

The nature of [EM funds’] investments prevents them from gaming their IRR (e.g., no subscription lines, not easy to exit early their home-runs). I have heard countless emerging market PE funds say that because their true rates of returns after fees are only about 10%, fundraising is very difficult. American PE funds, among others, also have actual returns of about 10%, but many can show misleadingly high IRRs instead. These effects might create major misallocations of capital in addition to unwarranted wealth transfers.

Think about it.


The SEC’s Office of Compliance Inspections and Examinations released a Risk Alert last month for investment advisers managing private funds.

After reading through the laundry list of deficiencies, one wonders how the same SEC could facilitate retail investment in private equity funds.

Consider a handful of the observations:

Conflicts related to allocations of investments. The staff observed private fund advisers that allocated securities at different prices or in apparently inequitable amounts among clients (1) without providing adequate disclosure about the allocation process or (2) in a manner inconsistent with the allocation process disclosed to investors, thereby causing certain investors to pay more for investments or not to receive their equitable allocation of such investments.

Conflicts related to service providers. The staff observed inadequately disclosed conflicts related to service providers and private fund advisers. For example, portfolio companies controlled by advisers’ private fund clients entered into service agreements with entities controlled by the adviser, its affiliates, or family members of principals without adequately disclosing the conflicts.

Allocation of fees and expenses. Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses.

Valuation. The staff observed private fund advisers that did not value client assets in accordance with their valuation processes or in accordance with disclosures to clients (such as that the assets would be valued in accordance with GAAP). In some cases, the staff observed that this failure to value a private fund’s holdings in accordance with the disclosed valuation process led to overcharging management fees and carried interest because such fees were based on inappropriately overvalued holdings.

I’ve said previously that I’m of two minds on the question of retail participation in private equity funds (see 401(k)s — The Final Frontier from November 2018).

However, it is manifest that U.S. asset managers need to up their game.

Beach Reading

Here’s what I read on my first beach trips and what I’m planning to pack for the next one — the latter are liable to change on a whim.

Screen Shot 2020-07-22 at 12.28.20 PM
  • Putin’s People — Catherine Belton
  • Trade Wars Are Class Wars — Matthew Klein & Michael Pettis
  • Enemy of All Mankind — Steven Johnson
  • Apeirogon — Colum McCann
  • The Kingdom — Emmanuel Carrère
  • Angrynomics — Mark Blyth & Eric Lonergan
Packing for Next Time
  • The Old Drift — Namwali Serpell
  • The Silk Roads — Peter Frankopan
  • The Three-Body Problem — Cixin Liu
  • Wolf Among Wolves — Hans Fallada
  • The Persistence of the Old Regime — Arno Mayer
Recommendations welcome!


I recommend Trade Wars Are Class Wars and Enemy of All Mankind.

From the Bookshelf

What we are dealing with in short is a new fundamentalism. In the absence of articulate resistance, education will place us under the charge of the communitarians of the day, with their many small communities, and their controlling belief that we can only be real if we represent others like ourselves …

… The idea of personal thought, of making one’s own experiment in life, often the very belief in intellectual liberty is scorned. I am to be judged not by what I say, think, feel, or believe but by where I come from and by what and how much I am willing to do in a group whose moral soundness has already been judged acceptable.

— David Bromwich, Politics by Other Means: Higher Education and Group Thinking
(Yale University Press: 1992)

# # #

Haven’t signed up for our newsletter yet? Sign up now.

# # #

The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2020, all rights reserved.