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Hey!

If you’ve been following me on here for a while, you might have noticed that I stopped posting as much – that’s because I migrated over to Substack (click here to see my work!) and have been active on YouTube! I am going to cross-post to here from now on, but just wanted to let you know!

Thanks for following along on my journey 🙂

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My current interests are commodities, monetary policy (some things never change!), waste management companies, and the metaverse.

The Coinbase Direct Listing: A Crypto Signal

This is a broad macro piece on my thoughts around Coinbase. I am not nearly as knowledgeable on crypto as many others, and I have linked to more in-depth work below for those that want a deeper dive!

The Coinbase Direct Listing

Coinbase is going public *sometime* today through a direct listing, similar to Roblox, Spotify, and Slack.

This is a big deal, for several reasons

  • It’s a socialization of crypto at a level that we haven’t seen before. 
  • If the SEC is letting them list, that means that there is some level of acceptance for crypto of the top of the regulatory hierarchy. 
  • For that reason, Coinbase is more of a signal of crypto normalization versus purely a company listing – some people have compared this as a moment similar to the Google IPO 

There a few different ways to think about Coinbase [network effects + liquidity]

  1. A Bitcoin exposure
  2. An exchange

Also, some key points:

  • The Market Mechanics: Coinbase makes money when crypto goes up or when there is market volatility – which is fine for a growing crypto market, but could be tested in volatile times.
  • Coinbase is not Bitcoin: It’s not just Bitcoin – the company is diversifying away from pure Bitcoin exposure (~44% of transaction revenue in 2020) and they continue to add more crypto assets to the platform.
  • The Moat: 90% (!!) of customers found them organically – they spend very little on sales and marketing.

An Overview: The Crypto Space 

The total estimate worth of crypto companies is ~$500bn with a total crypto market cap of $2T (data from Dan Held). There is a lot of money flowing into the space right now.

  • Blockchain.com: Just raised $300M at a $5.2B valuation 
  • Fireblocks: Just raised $133M
  • PayPal: Curv was acquired by PayPal for a rumored $500M
  • BitPanda: Just raised at a $1.2B valuation
  • Anchorage: Just raised $80M

I think that the crypto space is just really beginning to get the recognition it likely deserves. For that reason, we will see continued growth of the above. That’s great for crypto, and good for Coinbase if they can hang onto their market share. But in a growing market, nothing is really promised – and Coinbase could fall behind as the smaller, scrappier shops begin to innovate behind the scenes.


A Bitcoin Exposure

Outside of the pure crypto market, there are a lot of publicly traded companies that now own Bitcoin, the most recent one notably being Tesla. The two have begun to trade in tandem – but several other companies (mostly MSTR) have outsized exposure to BTC. This makes these companies somewhat of a proxy trade to BTC. 

With Microstrategy, 84% of their market cap is bitcoin – meaning that $0.84 of each $1 goes to Bitcoin when you purchase a MSTR share. It’s a relatively expensive way to own Bitcoin, but gives optionality to investors who might want a more “hedged” way to invest in crypto. A similar trade could happen with Coinbase.

  • Coinbase as a crypto tool: Some investors could see Coinbase as an indirect way to invest in the crypto market. The two definitely move together, with most of Coinbase recent revenue driven by the crypto bull run and volatility. Right now they store ~12% of the market cap of crypto assets.
  • A Tool for the Uncertain: The direct listing could be a way for the crypto-uncertain to get first hand exposure to the market, which could be bullish for Coinbase in the long run. It’s definitely one the most accessible component of the market right now. 

Q1 2021 Data

Coinbase had:

  • ~$1.8bn in revenue (~60% more than all of 2020)
  • ~$1.1bn in adj EBITDA
  • $730-800mn in net income

Their user base is very large – 56mn users is bigger than most banks, besides JPM. Coinbase is set up to a lot of volume this year – potentially more than the other exchanges. Their revenue is broken out into 3 segments:

  • Transactional revenue: based off trading volume and driven by a 142% increase this year (this is where ~80-90% of their revenue comes from)
    • Bitcoin and Ethereum trading drove ~56% of their total trading volume 
  • Subscription revenue: custody and staking fees (driven by number of customers and value of crypto) – this grew 126% in 2020, showing some room to the upside (and allowing them to diversify away from transactions)
  • Other Revenue: selling treasuries of BTC and ETH

But the current issue with Coinbase is the fees. Equity markets are mature and relatively efficient, and pricing reflects that. Once some of the incumbents begin to trade crypto, some of the success that Coinbase is experiencing with its numbers (specifically, transaction revenue) could begin to compress as the race to the bottom begins.

Fees and the Race to the Bottom

Coinbase does currently make most of its money through trading fees. Coinbase is currently an average fee of ~0.5% – for comparison, Binance is ~0.10%. As highlighted above, most of Coinbase’s revenue comes from transactions and a lot of that revenue comes from retail investors. This is volatile exposure, as the retail investor is quite fickle.

  • Matching Competitors: If Coinbase has to match Binance, that’s going to result in a profit compression.
  • More Institutional exposure: If they have more institutional customers, fees will compress even more.
  • The Retail Investor: The retail investor moves with crypto cycles, as we saw in 2017. If another bear market happens, that could be bearish for Coinbase.

Any amount of fee reduction will obviously bite into their profit. But if they have to match the OG exchanges, it could get pretty painful.

  • For comparison, ICE and Nasdaq made ~0.01% on each dollar of their trades. That’s lower than Binance – and much lower than Coinbase.
  • Because of this Coinbase was able to generate 0.75x more in revenue versus Nasdaq – but adjusting for the change in fee (if one day Coinbase has to match the exchanges)
    • Now: Coinbase trading volume of $335bn x 0.5% = ~$1.7bn in revenue
    • Matching Nasdaq: Coinbase trading volume of $335bn x 0.01% = ~$33.5mn in revenue 

That’s a huge difference in profitability. Coinbase likely has more time until that happens (they’ve built themselves quite the moat) but in a price taking market like exchanges, they don’t have a lot of room to keep fees high which is a longer term concern.


Technical Risks

I think Coinbase going public could create some security concerns for Bitcoin and other crytos. Coinbase highlights in the S1 that 

  • Disruptions, hacks, splits in the underlying network also known as “forks”, attacks by malicious actors who control a significant portion of the networks’ hash rate such as double spend or 51% attacks, or other similar incidents affecting the Bitcoin or Ethereum blockchain networks;
  • hard “forks” resulting in the creation of and divergence into multiple separate networks, such as Bitcoin Cash and Ethereum Classic;

There is fork risk – “ The effect of such a fork would be the existence of two parallel versions of the Bitcoin, Ethereum or other blockchain protocol network, as applicable, running simultaneously, but with each split network’s crypto asset lacking interchangeability.” This creates two issues:

  1. Security risk: Double-spending, splitting of mining power (which creates vulnerability) as well as business risk to Coinbase from the impact
  2. Asset valuation risk: This is where the lack of centralization is actually a bad thing – because there is no central governing body, there is no key decision maker determining the “nomenclature of forked crypto assets”. That could wipe out asset value, and result in a lot of angry Coinbase customers.

Valuation: The $100bn Question

Coinbase is expected to debut at a $100bn market cap. That will be higher than most U.S. exchanges, which is interesting. Does that mean the exchanges are undervalued? Or is this just really bullish for crypto?

This $100bn valuation prices it higher than both NDAQ and ICE. This is tough.

Coinbase is tied to the cryptomarket, for better or worse. That means they have tremendous upside, but could also struggle if the cryptomarket struggles. A lot of analysis points to investor sentiment as the most important multiple – and I agree. They are likely to trade well north of any fintech/exchange competitors. 

  • The run rate of $750m of income would be ~$3bn in income for 2021. At an estimated 261m shares oustanding that would give them a 21.9x forward P/E ratio, assuming they price off of the reference price of $250/share (they likely won’t). If they go off to $100bn, that’s a 33.5x P/E ratio (higher than incumbents), but really not terribly drastic in the froth market we live in.
  • If we assume $7bn in revenue (annualized from ~$1.8bn Q1), the $250 reference price would place them at 9x sales, and 14x sales at $100bn. However, they are likely to run away here – I wouldn’t be surprised if they go up to a $150bn market cap, which would be 21.4x sales.

CBSE is pricing them much higher – around a $144bn market value. For many reasons, I struggle with some aspects of valuation in the current market environment.

I think Coinbase is going to price off rocket ships.

Dogecoins movement over the past few days alone (even though Coinbase doesn’t trade it) is enough of a signal of what the market expects out of crypto.


Conclusion: This is about Crypto

I think Coinbase is just the beginning for crypto. Does that make it a good investment? Maybe not. Is it a signal? Yes. Coinbase allows for accessibility, creates demand, and allows others in the crypto space to build.

As Jill Carlson said, “Coinbase is a growing business, in a growing industry, centered around a growing asset class.” The biggest thing about the Coinbase is that it is a signal to the broad market that crypto is real – and that it is here today. 

Today is an interesting day because there are bank earnings and Fed chairs are speaking. It feels like a clash of two worlds –  although Bitcoin and crypto are increasingly gaining adoption, the rate of adoption isn’t as fast as some would think. Coinbase is likely to change that. 

There are some long term headwinds – technical risks like forks, fee compression – but Coinbase going public is a good thing for crypto signaling to the world.

Read More Here:

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

The Stonk Market: How the Markets Became a Meme

The market is no longer driven by fundamentals. It’s driven by memes.

What is a meme? A meme is an idea, behavior, or style that becomes a fad, spreading by means of imitation from person to person within a culture. They drive how we interact and serve as visual news sources, and ultimately are tools of navigation. We use them as methods to process the massive amount of information thrown at us every single day. 

This broader meme movement is reflected in something important –

The stonk market.


The Meme Market

The stock market is a reflection of memes, notably magnified through SPACs, NFTs and GME. The memefication has displaced reality from valuation, as fundamentals grow less and less useful as each new flying helicopter company hits the market.

It’s not a bad thing – it just reshapes how we think about investing and the decisions that we make around portfolios. This is a hype cycle in a bull market. It’s to be expected. The core drivers are some of the financial tools (SPACs), but it’s also the broader market environment – memes are no longer a metaphor, but a living structure, called the stonk market.  

The perfect meme storm has been created through a combination of 4 factors:

  1. Market enthusiasm: A function of lack of consumption opportunities during the Pandemic and information access via Reddit forums/Twitter etc
  2. Risk-on sentiment: The “Pandemic YOLO” coupled being stuck at home
  3. Liquidity: As ~40% of stimulus checks headed right to the stock market, it makes sense that excess will create exuberance.
  4. Meme markets: SPACs, NFTs, and GME are all real products that can be traded, and have financial value, but at their core, they are memes.

The markets are currently driven by a core memetic thread resulting in the disconnect of reality from fundamentals. This can be looked at from a few different angles – SPACs, NFTs, r/wallstreetbets, and the general frothiness that information access creates. There are several people who have built incredible systems around this (most notably, Alex Good – linking his checklist here). As Alex states in one of his weekly recaps –

“Equity markets are becoming delegitimized by SPACs and meme stocks… the free markets themselves, are largely a meme.”

There are 6 parts to the memefication of the markets, fueled by the 4 factors above.

  1. SPACs
  2. The Tesla Effect and Elon Musk
  3. ARK Invest
  4. NFTs
  5. GameStop
  6. Retail Investors

SPACs: Memes as investable narratives

SPACs have gotten a lot of attention recently, with a lot of investors getting into the SPAC game. SPACs have an interesting structure, because they are basically a shell company with a dream. Investors invest with the SPAC with the hope that the SPAC will take a company public. SPACs have looser regulations relative to IPOs (the more traditional path to going public).

IPOs are normally conducted through a middleman, with underwriters interpreting the growth for investors. SPACs can circumnavigate that with softer regulatory constraints and tell the whole story (however outlandish that story ends up being).

Here’s how the structure works (at a very high level):

SPACs are fascinating because they are a mystery box IPO – it could be anything, ranging from EV, AI, Robots, terraforming, and vertical farming – and that’s new and exciting. And that excitement is reflected in the market movement.,

  • 2019: 59 SPACs raised $13.6bn
  • 2020: 248 SPACs raised $83bn
  • March of 2021: >260 SPACs raising ~$80bn

We are only 3.5 months into the year, and SPACs have already outpaced all of 2020 numbers. If we continue at this pace, we will see $275bn of SPAC flows, across more than 900 SPACs. Considering the structure of SPACs, this will make hedge funds and SPAC sponsors happy, but investors are likely getting the short end of the SPAC stick.

The important thing to remember is that SPACs are tools. They are financially engineered products. They can be multipurposed – sometimes they are an investment opportunity, but sometimes, they can be used to simply shift risk:

  • Hype Cycle: The SEC had to step in and warn against joining a SPAC because so many celebrities were forming their own – with the reminder that hype and performance are not positively correlated.
  • Risk Reallocation: Sometimes the SPACs can be used to pay down debt. That shifts the risk of a levered SPAC and the loan investor to the equity investor – allowing the company to have a more liquid balance sheet and eliminate high-yielding private debt
  • Sponsor Incentives: SPACs are popular because it’s an easy way to get paid as a sponsor. They earn about 20% of the equity independent on deal outcome – and post-deal, the owners of the SPAC are left holding the company.
  • Supply and Demand:  There are about 400 SPACs on the hunt for target companies – which is a lot. There were 480 IPOs in 2020 (1.5x more than any other year). There are two headwinds here: supply of companies (there are only so many companies that are ready to SPAC) and demand of SPACs (lack of choice can lead to bad decisions)
  • Bad Companies: Because of the combination of supply and demand misbalance, the incentives of sponsors, and the potential for SPACs to simply be a way to shoulder off risk, sometimes bad companies can get SPACed.

SPACs are shells. They raise money with the intention to buy a company – whether that be a good or bad company is uncertain. Investors are truly investing on hope, in a way that transcends the usual pre-revenue tech investment.

SPACs sell because they have a story. They have narrative.

Memes are visual narratives. SPACs are investable memes.


Elon Musk + The Tesla Effect: The billion-dollar tweets

SPACs are connected into Elon Musk and Tesla. Most EV companies that are hitting the market are doing it through SPACs, and Tesla sets an interesting precedent for the EVs to match. This part of the meme market is compounded by two things:

  1. The Tesla Effect: Tesla’s existence tacks additional multiple onto to any EV business, solely through association.
  2. Elon Musk: Tesla is led by Meme King that creates billions of dollars in value simply by tweeting

Elon Musk

Some of the Tesla Effect (>50% most likely) comes from having Elon Musk as the CEO.

Elon is an embodiment of the meme market. He is remarkably successful at it – renaming himself Technoking of Tesla, his association with Doge, his $420 share price target for Tesla, randomly tweeting company names, his involvement with GameStop (Gamestonk) and so much more – he has created billions of dollars in value from tweets.

Knowing that you can tweet things to move markets is immensely powerful. He is very good at what he does, both in creating value for Tesla and pumping random cryptocurrencies. That power carries across the industry, fueling the Tesla Effect, and subsequently, the valuation of the EV SPACs.

The Tesla Effect

Tesla is a golden-child stock. It has defied expectations, achieved S&P 500 status, and got very close to a $1T market cap. Elon Musk created Tesla into what it is – and that success has manifested additional multiple onto any other EV company.

The EV companies are bold in their vision. There’s an article in the WSJ that discusses the big plans of the companies relative to Google. The fastest growing startup ever, Google took 8 years to reach $10b in sales.

Source: WSJ

5 Electric Vehicle companies think that they are going to beat that record (despite some having $0 sales at the moment). They’ve executed on deals with SPACs despite producing no revenue. Zero-revenue companies are not new, and lofty goals are always appreciated.

But these valuations are fueled by the coattails of Tesla, the general hype market, the froth of the SPAC environment, and the broader easy money atmosphere. This leads to mispricing.

There’s a research paper that analyzes the underperformance of the EV SPACs through the lens of the “Tesla Effect” (and subsequently, the Elon Effect). With the EV SPACs:

“Many mispriced SPACs in 2020 were linked to electric vehicle-related businesses (“Tesla effect”), raising concern whether investors understand what they are buying. On average, SPAC unit prices are higher after announcements of business combination, and more so for electric-vehicle SPACs… The coefficient on Thematic (cannabis and space) is indistinguishable from zero, suggesting that much of the mispricing may be limited to EV SPACs.”

EV SPACs are more mispriced relative to other SPACs.

Investors were associating these EV companies with Tesla and Elon, and assigning an arbitrary dollar sign to that, simply by association. A relative valuation, but a misplaced conclusion.

The Headwinds to the Tesla Effect

The EV industry has a significant amount to navigate over the next few years.

  • US legislative and regulatory efficiency
  • Limited availability of lithium
  • Issues with hydrogen fuel cells (notably with PLUG and FCEL).

Investors seem to be ignoring all that. There is a significant amount of money flowing towards EV companies. The thesis is not on fundamentals, but on hope and optimism yet again. Once again, not an inherently bad thing.

But memefication implies understanding. If we know enough to meme it, that means that we can distill it down and process it. But with SPACs, they aren’t understood – especially the dilution impact as illustrated by Nikola. Money flows are fine in a high growth environment, but as soon as the market pulls back, EV SPACs are going to be hit pretty hard. They are an incredibly elastic good in a competitive market fueled by association to one of the biggest companies in the world.

SPACs and Tesla are driven by meme markets. Tesla itself is fueled by Cathie Wood and ARK.


ARKK: Reversion to the meme

ARK owns a lot of Tesla. The funds have a ~10% exposure to Tesla. Tesla owns a lot of Bitcoin. And through Square and Grayscale, ARK has even more exposure to Bitcoin. So when Bitcoin’s price drops, there is this potentially ugly forced selling dynamic, which causes pain not only in Tesla, Bitcoin, and the ARK funds, but also in the Biotech stocks that ARK is a whale in. 

ARK is then caught in a feedback loop with Bitcoin and Tesla. ARK also has a lot of inter-stock correlation too, with most of their top holdings (SQ, TLSA, TDOC, ROKU) mimicking each other’s performance.

ARK itself now owns > 10% of ~30 companies, according to Bloomberg. On top of that, there is an affiliate fund, Nikko Asset Management – and when combined, they control 20% or more of an additional 10 companies. The two own more than 25% of at least 3 businesses: Compugen Ltd., Organovo Holdings Inc. and Intellia Therapeutics Inc. Those are hefty positions in volatile companies.

This concentration works now because of the four market drivers: enthusiasm, risk-on, liquidity, and memes. But, as seen recently, moving yields will put pressure on tech valuations, which ARK has significant exposure to. These high-fliers that are based on cash flows 10-20 years in the future are vulnerable to rising rates – and if their valuations compress, that could be very bad for ARK.

With ARK, there is (broken out really well here):

  • Magnified illiquidity: ~20% of NAV is in illiquid biotech stocks that ARK is a whale in
  • Volatile Companies: More than half of the companies in ARK ETFs (85 out of 165 according to the WSJ) were unprofitable in the last year. Not being profitable is not a bad thing, but it can be a volatile thing, which could be painful if the rotation out of growth continues.
  • Inter-correlation:  ~40% of the fund is dedicated to 7 companies that move together. TSLA, TDOC, SQ, ROKU, Z, BIDU, SHOP, and ZM perform similarly.
  • Concentration risk: TSLA is ~10% NAV across several funds. It would be more if it could be more.

ARK benefits from the concept of reflexivity too, as reflected by their inflows over the past year – rising prices attract more investors, and that’s a cycle within itself. Reflexivity, and investors chasing moving prices, shows up in another meme byproduct – NFTs.


NFTs: Perhaps a fart is art

NFTs are non-fungible tokens. With money, each dollar bill is the same, but with art, no painting is exactly like another – same with writing pieces, books etc. NFTs are meant to capture that uniqueness. They are digital assets, a cryptographic key to a particular address on the blockchain that points to the asset that you have NFTed.

The value to NFTs comes in three parts (highlighted in Santiago’s tweet thread):

  1. Ownership and Authenticity: NFTs are a noun, not a verb – they point to the asset, they aren’t the asset themselves. It becomes property that you can buy or sell just like any other property (the legality of which still needs to be worked out). The inherent basis of supply and demand makes the market.
  2. Abstraction: Money is just an abstraction of value.  Art an abstraction of emotion. Digital assets an expression of code. NFTs are an abstraction of all three. Noelle Acheson describes it really well in her recent piece on emotions in the market – “If NFTs, in theory, give us price discovery on feelings such as “pride of ownership.”
  3. Purpose: Its not about the merits of the medium, but rather the merits of talent. Just because it isn’t a painting doesn’t mean its not art

Broadly, it’s a mix of FOMO and memefication, with people NFTing ridiculous things (like a fart) but also beautiful works of art. That’s the hard part about memes – they are inherently clever and valuable in disseminating information to people, whatever we choose the information to be. Perhaps a fart is art.

There are worries of sustainability – proof of stake would be more efficient than proof of work. In order for this to scale, it does need to be contained. The current environmental concerns that crypto in general causes needs to be capped in order for them to be scaled.

If the environmental concerns do get worked out, it seems that NFTs will likely be around in some iteration as we rethink online property rights and move more into the digital age. But the current frothiness and heat in the NFT market is unsustainable – a situation that is also reflected in GME.


GME: The momentum of the collective meme

GameStop.

GameStop is the collective power of the meme market in its prime state. r/wallstreetbets has been around for a while, moving other companies before GME. When Hertz declared bankruptcy in May, 140k Robinhood traders added it to their portfolio, causing the share price to spike by > 1,000%. They did the same thing with Kodak.

GameStop was a combination of market forces. It was Hertz and Kodak but amplified.

There were 3 main drivers here:

  • Exogenous shock: The Pandemic created a lot of volatility and movement in the markets.
  • Stimulus package: This was a true liquidity inflow among a lack of consumption opportunities
  • Collective coordination: r/wallstreetbets is the prime example of the power that information access provides

Keynes said it best when he said “markets can remain irrational longer than you can stay solvent”. With GameStop, that’s the exact situation. It was 4 main players:

  • r/wallstreetsbets (within that was DFV)
  • Hedge funds: Melvin Capital and Citron Research
  • Brokerage firms: Interactive Brokers, WeBull, TD Ameritrade
  • Public figures: Michael Burry, Elon Musk, Chamath, AOC, Alexis Ohanian

The Set-up: DFV has been posting his GameStop trades for a while and has been bullish on the company back when it was ~$2/share. trades way way back, he’s been doing this forever. And Michael Burry of the Big Short announced he was long GameStop. And then in 2021, Ryan Cohen joined the board. r/wallstreetbets is a place for people to post memes and talk about trading. They keep a close eye on hedge funds – and they noticed that the hedge funds were short GameStop. And a perfect storm was created:

Hedge funds have a strategy of short selling – making a trade expecting the price of a company to go down. More specifically:

Short interest in GameStop was almost comically short – 140% of free float, meaning they were short more shares than were even available. r/wallstreetbets decided to take advantage of that, and engaged in a coordinated move to push the price higher.

Short Squeeze: Hedge funds were short GameStop, so r/wallstreetbets began to buy shares and options to put upward pressure on GME

  • The stock began to go up in price
  • This triggered margin calls, where the short sellers had to buy back a higher price
  • The buybacks triggered more demand for the stock and drove the price up

This short squeeze bled into a gamma squeeze, as dealers tried to hedge against the increase in the price of stock.

  • The stock began to go up in price (GME was just a giant momentum trade)
  • Option buying resulted in the price going even higher
  • The hedging of the stock resulted in the stock price going even higher
  • Rinse and repeat

Robinhood and the other brokerages halted trading. There were potential liquidity, solvency concerns. The brokerages had to protect their financial positions. The DTCC (Depository Trust & Clearing Corporation), the main clearinghouse for U.S. stock markets, demanded collateral from brokerages including Robinhood.

But people thought the brokers were shutting down to protect the shorts.

Some of the reasoning came from the brokerage revenue model: payment for order flow. Market makers, such as Citadel Securities or Virtu, pay Robinhood for the right to execute customer trades – so people thought trading was halted to help them, which only fueled the anti-establishment narrative even more.

Public figures (Elon, the Meme King) posted about GME. The rise of GameStop is the manifestation of the meme markets. It’s not going up on fundamentals – it’s going up because it can. Because bubbles can be created. Because the markets are abstract and divorced from reality.

GME was the peak of memefication. It was the memefying of the entire financial industry.

GameStop is still going up. The system hasn’t been debased entirely, but there are real structural cracks that bubbled to the surface. It’s uncertain of what the “final” outcome will be – and retail investors are still entering the market in droves.


Retail Investors: The Powers that Be

r/wallstreetbets is primarily retail investors. Retail investors are a big part of the memeficiation story. As a retail investor and a staunch advocate for investor education, I don’t think this is a bad thing. But I do think that some people are treating the market as a casino, not as a place for long-term wealth creation. And I can’t say I blame them.

Retail by the Numbers

Retail investors account for ~20-25% of all value traded in the market, up from 10-15% a year ago. GME put investors at the forefront of this conversation, giving them the power to actually move markets. Robinhood, a key part in providing access to investors, has added 6mn users over the past 2 months. Call option volume is at all-time highs. People are trying to figure out what money actually means. Several market factors gave investors the tools to start exploring trading:

  • Accessibility to margin debt and information access
  • Online brokers and low commissions
  • Stimulus checks and excess time in the Pandemic

Crypto was a leading indicator here, where retail has been more prominent and active relative to institutions. Even in the crypto space, investors are primarily concentrated in speculative assets. I am sure that a percentage of investors are bullish on the core part of these companies, but there is a lot of money chasing returns too – which is not inherently bad (money is money) but does underscore the continued move away from fundamentals.

Source: Coinbase S1

Retail and Institutions

The Fed has a communication problem now, as do institutions. The Fed is ignoring the collective asset bubble in favor of transient inflation and easy policy, and institutions are moving far too slow in our hypergrowth world.

This gives retail investors a lot of power. From The Equity Market Implications of the Retail Investment Boom:

“Despite their negligible market share of 0.2%, we find that Robinhood traders account for over 10% of the cross-sectional variation in stock returns during the second quarter of 2020. The inelasticity of equity markets, which is potentially driven by investment mandates and the rise of passive investing… It is the inelastic demand response of institutional investors, that allows retail traders’ demand shocks to have sizeable price effects… Robinhood traders also boosted the recovery in Q2 by adding 1% to the aggregate stock market valuation.”

We have so much information about so many things that the gatekeeping doesn’t make sense anymore. Institutions still have a lot of power – Bill Ackman’s CDS trade is a great example of the power of the institutional voice carries. But there is a change in tone. GME was more than just a meme of a stock or posting something in a Reddit forum – this was a collective knock on the door of the ivory institutional walls.


What’s Next?

What is beyond the meme markets? There are several things that I am keeping a close eye on (my attempt to integrate the fundamental into the meme!)

Earnings Numbers: There is a big gap between non-GAAP and GAAP (median difference between non-GAAP EPS and GAAP EPS was ~30% in Q42020) profits as the “adjusted for the pandemic numbers” begin to shake out. It will be important to discern what non-GAAP actually means, especially in context of memefluences.

Energy market: The five supermajors—ExxonMobil, Chevron BP, Total and Shell—generated $20.5 billion in free cash flow, defined as the amount earned from their core business operations minus capital expenditures. Meanwhile, they rewarded shareholders with $49.9 billion in dividends and share buybacks in 2020. This itself isn’t surprising – but industry shifts could make this  unsustainable.

  • Oil is coming under pressure from a myriad of variables. Most of the pressure will end up constricting supply, which will give it structural upside and cause prices to spike.
  • It will be important to watch for the reflation trade, with the potential for banks and oil to catch a bid if people rotate out of tech

The Fed: Fed and Foreign buyers can keep long-end Treasury yields from moving too high (if yields keep moving, that could put a quick pin in the current asset bubble).

  • The Fed has been incredibly dovish despite the inflationary pressures that the market is expecting. Foreign buyers have been relatively quiet. As yields tick up, this will entice buyers to the market – but the Fed seems resistant to acknowledge the changing environment.

Treasury Movement: The Treasury is planning to reduce the very large balance of Treasury General Account (a liability for the Fed).Yellen recently laid out plans to reduce it from $1.6trillion to $800 billion by the end of March, and then further to $500 billion by June, which would be  ~$1.1 trillion of liquidity hitting the system

The 10Y: We’re in an interesting situation where markets are pricing much more rate hikes than the Fed’s latest forecast. Powell has done his best to calm the markets, but the 10Y is still ticking up persistently. If it continues, that could put a lot of pressure on tech.

  • Inflation: Breakeven inflation expectations just broke through 2%. I am worried that there is a ton of liquidity about to hit the market, but I think that people are going to spend more on travel and going out as we reopen over the next several months.

What do the Meme Markets Represent?

SPACs, NFTs, and GameStop are all people testing the limits – memefying things in a way to reimagine how we make money. I am very bullish on the creator economy –giving people the tools to create their own future. People are increasingly wanting to work for themselves and “be their own boss”, and I think the market memefication is an iteration of that. The idea that the financial industry is the gatekeeper to the ivory tower of money isn’t as accurate as it used to be.

Memefication is a function of information access, and subsequently, the market is fueled by this meme access. This is a broader sociological phenomenon, but meme markets show the growing power of the retail investor, as well as the structural cracks in the current market.

Borrowing from Dawkins:

Socrates may or may not have a gene or two alive in the world today, as G.C. Williams has remarked, but who cares? The meme-complexes of Socrates, Leonardo, Copernicus and Marconi are still going strong.

The meme complexes of the financial system are going strong. The market is no longer driven by fundamentals – it’s driven by memes. No longer a metaphor, but a living structure – the stonk market.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

Roblox and the Creator Economy

Today’s piece takes a deep dive into the potential of Roblox ahead of their DPO!

The Open-Source, Creator Economy

Roblox is a call option not only on the metaverse, but the open-source economy. We are entering a world where people are building for themselves – and Roblox is an iteration on the path towards a creator-led decentralized future.

Roblox = Identity + Friends + Immersive + Anywhere

What is Roblox? Roblox is not just a game but rather a “human co-experience platform”. It is currently the most popular game in the world, specializing in UGC (user generated content). Founded by David Baszucki and Erik Cassel in 2004 (and launching in 2006), the game is a multiplayer platform that allows users to 1) build games and 2) play games (with potential and access to much more). Their mission is to “bring the world together through play”.

Roblox launched on PC in 2006, mobile in 2011, and Xbox in 2016. This multiplatform access led to its explosion in popularity. The company has remained focused on curating the in-game community. Roblox is still free-to-play, monetizing through Robux (an in-game virtual currency), in a series of microtransactions (that could evolve into a full economy (NFTs, creator stock market, etc)).

The game has always had creators at the core of its mission, focused on giving developers and creators the tools to build, rather than aesthetics and flash of the games, with the world remaining pretty blocky until 2015. Most people still view it as a game for kids, but they have a huge opportunity to age up their user base.

Source: Dev Forum

They also have the opportunity to break outside of just the game industry (which they have taken steps towards). Roblox wants to expand its platform to encompass all parts of virtual life – the avatars will be used across all facets of existence, from gaming to social media, to education, and to business.

Roblox is priming itself to become a place for work and play, allowing collaboration and socialization. Roblox combines everything in its ecosystem – providing fertile soil for creators to grow, while also providing infrastructure to facilitate broader social interaction.

There are 3 main growth opportunities for Roblox:

  1. Curating Developers and Creators [The Creator Economy]
  2. Expanding the Social Network [The Evolution of Social]
  3. The Metaverse [Integration with the Blockchain]

I am incredibly bullish on the creator economy, the evolution of social, and the potential of blockchain integration in our daily lives. And I think Roblox is a steppingstone in this path.

Roblox Owns the Ecosystem

Creators + Social Network + Metaverse

Roblox is a trio of products that interact to form an ecosystem: the Roblox client, Roblox Studio, and Roblox Cloud Services.

This all builds into the Roblox flywheel:

  • UGC Experiences: Content built by developers attracts more users, which in turn makes Roblox more attractive to developers as R$ flows – and then they build games that attract more users.
  • Social: Players play game with friends, who invite their friends, who then invite their friends
  • The Ultimate Flywheel: The more friends users have, the more valuable and engaging the platform becomes. Developers build more, bringing more users to the platform

The Four Roblox Differentiators

  1. The In-house Flywheel: Roblox owns everything. The production of games, the distribution of games on the platform, and the eventual monetization. This gives them a lot of space to build out a strong ecosystem (outside of games and into the metaverse!)
  2. The Future of Socialization: Roblox is a platform for socialization. Because of infinite builds, people can customize their corner of the platform, and share it with friends. It’s not just a game, it’s a place to create, host, play, and hang out (with safety protocols).
  3. Decentralized Content: Roblox does not “create” content, which does give it a financial upside. It can pay creators post their game publishing, which negates any upfront costs and helps mitigate the usual boom-bust cycle of traditional game makers. But also it gives total creative freedom for developers to build whatever they want, and incentivizes Roblox to build the tools to make this creation possible.
  4. Multi-functional, Accessible Ecosystem: Roblox is a place for gamers to become developers and for developers to curate their craft – the friction between the two roles is low. The game itself is simple enough but can be dynamic and powerful for those who dive deep. The YouTube-esque dynamic of creation and monetization gives Roblox a lot of potentialThey give creators a place to create and grow, in a truly accessible format.

These are some of the main levers that I could see Roblox using:

  • AR/VR software platform: Mobile-based augmented reality or headset-based virtual reality could go far in the Roblox world. People could truly create their own space, and Roblox could be the first one to get this right. They already offer a lot in the platform – hosting games, storing data and content, and a pretty efficient conversion process.
  • Beyond Gaming: Tying back into the first point, if Roblox can leverage AR/VR in our increasingly online world, we could be having our work meetings in the Roblox universe. A game engine could become increasingly powerful as we lean into our virtual lives.
  • Interoperability: This is where I see some crossover with blockchain and crypto (which deserves its own piece) akin to what Sandbox has done. Roblox has already leveraged an internal network, an entire ecosystem on one platform. If Roblox can execute on the metaverse, this functionality will be very impactful to its future.

The Roblox Economy: The Dual-Sided Marketplace

Roblox exists in a fixed economy. They control the exchange rate of Robux to USD which they can use as a point of leverage. Controlling currency rates is a powerful tool.

The Roblox marketplace interfaces between players and developers. Players buy Robux (RS) with real money which can purchase in-game items. The exchange rate is roughly $1 USD = ~R$0.01, which are usually bought in bulk or through a monthly subscription (Roblox Premium). Developers get paid at a rate of R$1 = $0.0035.

Side 1: What do players do with their Robux?

  1. Avatar Marketplace: purchase clothes, gestures, and emotes
  2. In-game purchases: Buying in-game experiences
  3. Accessing games: Buying into developer games and accessing special experiences

Side 2: How do developers and creators earn Robux?

  1. Access: Sell game access and enhancements
  2. Engagement: Get paid based on game engagement
  3. Studio Marketplace: Sell content and tools to fellow developers
  4. Avatar Marketplace: Sell items through the Avatar Marketplace  
  • The Developer Moat: There are currently ~7mn developers across 170 countries. Almost 1mn developers have earned something on the platform, with earnings > $200mn for 2020. This is an army of developers already in the Roblox ecosystem, and brings a lot of value to the platform.
  • The Skew to the Top: However, Roblox is running into the usual platform problem where the top creators get most of the economics – clearly reflected in the skew of game play. Developers need to be enticed to stay on the platform. Roblox is going to build out several ways for games to be showcased, which should encourage developer stickiness.
  • The App Store Dynamics: This eats into the developer relationship in my opinion. Robux purchases can be made across any platform, but website tends to be “cheaper” than the in-app purchases due to the app-store cut. iOS and Android take their usual 30%, which bites into the revenue that Roblox generates from app sales of $R. ~48% of their revenue is under the Apple (30%) + Play Store (18%), and ~70% of engagement comes from those apps. Roblox has to pay ~30% of revenue to the apps. Assuming that was negotiated away (one can dream), Roblox could be much more profitable – but the power of the app store is unlikely to go away too soon. But the important people is that people are spending – in 2020, consumer spending in the mobile version was >$1 billion in revenue globally.

The most important thing to note is Robux is the “money”, but DAUs are the key to monetization.

“The more users on our platform, the higher the engagement and the more attractive Roblox becomes to developers and creators. With more users, more Robux are spent on our platform, incentivizing developers and creators to design increasingly engaging content and encouraging new developers and creators to start building on our platform. “

If Roblox can spin up their DAUs (primarily through aging up users and getting more developers on the platform) that is a huge lever for growth. There are a couple of ways that Roblox can continue to spin this faster, two main ones being 1) growth abroad and 2) actively shifting their demographics.

Growth Lever 1: Abroad

Right now, Roblox primarily generates revenue from the US/Canada and Europe (~90% of bookings) but almost 70% of the DAUs come from non-US/Canada. This is huge potential to monetize abroad – they already have the presence, just have to capture the dollars. There’s room for another Considering 30% of the base drives ~$2bn in bookings, there is easily another >$4bn to capture. There are more than 2.7bn gamers in the world – the biggest areas of growth are in Latin America and APAC, expected to grow by 10.3% and 9.9%

  • China: China depends on government approval. Roblox has a JV with Tencent – which means that Tencent wants to get this right. China is a very powerful market, and it’s good that Roblox is partnered with Tencent. Access to this market is an incredible growth opportunity.

Growth Lever 2: Demographics

As of 2020, about 40% of Roblox users are older than 13 years old – a demographic that they want to continue to age-up. A lot of this will surround getting developers into the platform to build “older people” experiences, which comes from two angles:

  1. Curating the gamers that are already in ecosystem
  2. Getting third party developers to the platform

Roblox has to age up users to avoid going the path of Wii and Guitar Hero. The network effects are powerful, but there is a lot that the company could do to make this execute faster.

Roblox is spending close to 20% of 2020 bookings on R&D to enhance features and create new functionality. This is pretty low relative to other developers – they have room to spend out here (perhaps in the AR/VR space to entice older users). Aging up users is an important step in monetization because older users can pay more – and their strategy has been working, as the 17-24 year old is the fastest growing category on the platform.

Roblox and COVID

COVID has definitely accelerated their growth, with easily 3-4 years growth in a 1 year time span. With 37.1mn DAUs now playing ~2.5 hours of content a day, the company has a solid base to work from. Roblox is guiding towards lower growth in 2021, but I still decent expansion in their user base over the next several years.

The Video Gaming Industry

The market is growing. The video game industry is now estimated to be worth $160bn in 2020, expecting to grow to $300bn by 2025, and the VR market is roughly ~S10b, with expected growth to ~$50b by 2027.

  • The Evolution into the Metaverse: Roblox doesn’t feat neatly into a single category. Because it’s a social network for Gen Alpha (capturing 70% of 9-12-year olds), it can be compared to Facebook and Snapchat. Because of the metaverse spin, it can also be compared to other platform games such as Activision and Epic. I think that Roblox is building itself its own media category – the first iteration of the broader metaverse.
  • The Power of the Toolbox: Roblox themselves are not a developer (like an Activision), rather a toolbox. It’s sort of like if you went to a infinite construction site – people can pick up the tools and use them, build, and also enjoy the already built content.
  • The Future of Social: It’s also a social construction site (bear with the metaphor here) where people can play and build together. This construction site also allows people to visit other games – letting the Roblox flywheel spin. This flexibility allows for increased game play, enabling growth in games such as with Adopt Me! And Piggy – two of the top games on the platform to reach > 10bn and > 6bn plays, respectively.

Key Competitors

Unity, Epic, and Microsoft are other players in the space. The industry has done well in the public market, with Unity IPOing at a $13.6bn valuation in September 2020, trading at all the way up to a $47.8bn market cap at its peak in December.

  • Epic: Epic is relentlessly going after the metaverse. They have the Unreal game engine, Fortnite, which commands the attention of ~350mn people, as well as a well-curated developer base. They’ve been hacking away at the metaverse, focusing on video chat, facial recognition, and Manticore. If they can continue building out their audience, they could be a force of reckoning for Roblox.
  • Unity: Unity is developer-focused, cheaper to use than Roblox, and primarily monetizes through ads. Unity spends 40% of revenue on R&D, spending twice as much as Roblox despite having a much smaller revenue metric.
  • Activision Blizzard: Activision Blizzard is a developer and publisher of entertainment software, including Call of Duty, World of Warcraft, and Candy Crush.
  • EA: EA is the second-largest gaming company in the U.S., in a similar space as Activision.
  • Roku and Spotify: I think that Roblox deserves to be compared to these platforms too. Roblox is a platform, not a developer like EA and Activision, or just a game engine like Unity. Roku is a powerful growth story, offering streaming media content from hardware devices. Spotify is a streaming music platform, also with mature margins and a solid growth story.
  • Minecraft: Parent company, Microsoft, is always a point of contention. Minecraft is personally one of my favorite games – and a lot of other peoples too, considering the ~125mn MAUs.

Comp Table:

Quick Financials

  • Bookings: I think that Roblox can grow at a +25% CAGR into 2025. I am pricing in a lot of growth yet to be realized, but the opportunity of aging up DAUs and engaging their developer base gives them a lot of potential. Management was cautious towards 2021 numbers, highlighting COVID’s impact, but I still think they have room to the upside.
  • ABPDAU: Average bookings per DAU were ~$39.4 at the end of 2019 and is ~$57.8 in 2020. This is a significant increase and shows the power of monetization.
  • Free Cash Flow: They have incredible free cash flow generation, ~$292mn for the first 9 months of 2020 and ~$700mn in cash assets. They are well positioned to spend and allocate.

Returns

Below are some rough numbers. Their current valuation placed them at a $29.5bn valuation or ~$45 /share. However, they are set to price north of $65/share most likely. Using $67 a share, this is ~22x 2020 bookings and ~20.5x 2021 bookings. Using a ~25% revenue CAGR (roughly in line with Roku, Spotify, and Unity) and a 10x EV / Sales exit multiple based on a ~$43bn valuation, I can pencil in a 7% TSR CAGR into 2024.

I want to revisit these numbers, but I think that there is upside to Roblox, especially if all of the above is realized. They are a mature company, with mature margins, and aren’t (too much) of a hyper-growth, flying taxi company.

Direct Public Offering

Roblox saw that the market was frothy with recent tech IPOs. It raised a Series H and has decided to go public via DPO. They are primarily going public to attract more talent (~80% of their workforce are engineers). They will list on March 10th.

Opportunities

  • The Metaverse: I think execution of the metaverse (and early execution) is a huge opportunity for Roblox. They are well positioned to take stage here.
  • Growth abroad (especially in China) is a great opportunity to grow. I love the value that international game play and social experiences will have too.
  • Creator economy: I think that Roblox is a great way to get exposure to the creator economy. People are going to increasingly want to control their own futures, and Roblox is giving people the tools to do that.
  • The Future of Social: This is the next iteration of social. They have the engagement and the metrics.

Risks

  • The gaming market requires innovation and is accelerating quickly – Roblox will have to be cognizant of R&D spend in the space
  • Losing their developer community – if another competitor comes along that promises more money and audience for developers, they could be enticed to leave
  • Failing to grow outside of their current userbase – 9 to 12 year are awesome, but they can’t pay as much as adults.
  • They will have to spend more on safety and infrastructure moving forward. This will put downward pressure on margins, but is absolutely necessary to the viability of the business.
  • Google and Apple take rate could put pressure on their margins too, especially if Apple decides to change things around.

Final Thoughts

I plan to update this as I learn more about Roblox and their future plans. I am really excited about the future of the creator economy, and I think Roblox is an iteration of that growth path. They need to pay close attention to their developers and creators (pay them!), and create a space for their players to truly socialize and grow together.

I am bullish on their goals. I want to revisit this post-DPO, but am excited about this mature, creator-focused, multi-functional platform. I am incredibly bullish on the creator economy, the evolution of social, and the potential of blockchain integration in our daily lives.

And I think Roblox is potentially one step in that direction.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

The Bare Minimum

This piece discusses the minimum wage. I understand that this is a nuanced and delicate topic, and there are many points I did not address including systemic inequality, education, productivity indexing, and more. If you have thoughts or questions, please leave a comment!

The Minimum Wage

What will happen if we raise the federal minimum wage?

The pandemic has exacerbated the already uneven outcomes between lower-wage and higher-wage workers. Income inequality and the “distribution of prosperity” are at historically high levels, with much of this disparity heavily impacting minority communities.

Opinion | America Will Struggle After Coronavirus. These Charts Show Why. -  The New York Times

Source: New York Times

This is a contentious topic, with some arguing of cost-push inflation (a $15 minimum wage will result in a coffee costing $15 too) and some arguing that it won’t change the price of goods or result in mass unemployment – and that raising the minimum wage is one of the first steps to addressing the inequities of our system.

This article discusses:

  • The Current Labor Force 
  • The Structural Deficiency of the Minimum Wage
  • The Minimum Wage and the Cost of Production
  • The Complexity of the Issue
  • Potential Outcomes

TL;DR: Why should we raise the minimum wage?

  1. Healthier, more stable workers: There is power in being able to afford medical care, health insurance, and safe living conditions. Also, if the workers have children, those children are all to benefit from all of the above – and that compounds over time.
  2. Alleviating poverty: An increase in the federal minimum wage from $7.25 to $12.00 would be the first step to lifting 6.6 million people out of poverty.
  3. Addressing inequality: “Most low-wage workers are disproportionately women and people of color” and raising the minimum wage would work to reduce earnings inequality for these workers
  4. Respect for other humans: If this pandemic has taught us anything, it should be that essential workers are truly essential. These workers have been on the frontlines of a raging pandemic, literally putting their lives on the line to keep the wheels of the broader economy turning.
  5. Investing in the Future: This is not just a short-term fix. This is a long-term approach to fixing the decades of underinvestment in the U.S. population. This is a multi-generational, systemic problem, that must be addressed head-on.

Let’s first look at the labor force and the minimum wage in context.

Overview of the Labor Force:

  • 53 million Americans, or almost half of the labor force, earn low wages (a median annual income of $18k).
  • 1 in 5 of these workers (32 million) do not have employer-sponsored healthcare.
  • Low-wage jobs have increased since the 1970’s while middle wage jobs have declined, exacerbating the increasingly bimodal wealth distribution

The Minimum Wage

  • Throughout the 1960s and 1970s, the minimum wage was well above $8 per hour in relative 2019 dollars
  • It peaked in 1968 at $11.69 in 2019 dollars
  • This is well above the current minimum wage of $7.25 (which has been at $7.25 since 2010)
  • Several states have already increased their own minimum wage including California, Massachusetts, and Washington State
  • In terms of purchasing power, the minimum wage is worth ~17% less than it was 10 years ago, and ~30% less than the 1968 peak.
  • If it moved with productivity growth (like it did up until 1968), the minimum wage would be ~$24/hour.
Chart: A Brief History of the U.S. Minimum Wage | Statista
Source: Statista

The Structural Deficiency of the Minimum Wage

With this historical context in mind, what is the true cost of a too-low minimum wage?

Well, to begin with, there is no place in the United States where a minimum wage worker can afford a two-bedroom apartment, according to the National Low Income Housing Coalition. This is important as most people need a two-bedroom at some point, as they have kids and seek out larger spaces.

Source: NLIHC

One would have to make $24/hour to comfortably (aka have enough income for food, healthcare, AND housing, etc) to be able to afford a two-bedroom (funnily enough, right in line with the aforementioned “productive wage”) and $20/hour to afford a one-bedroom, compared to the current $7.25 federal minimum wage.

That leaves a gap of ~$17 and ~$13, respectively. Per hour.

In order to make that difference up, one would have to take on at least 2 more minimum wage jobs.

They would have to work nearly 100 hours per week to get a 2-bedroom, and nearly 80 hours per week for a one-bedroom.

We tend to miss the forest for the trees, especially when discussing the unemployment rate. As Martha Ross, a senior fellow at Brookings explains:

“[The unemployment rate] is important, and we shouldn’t lose it. [But] if wages aren’t enough to support yourself, then the low unemployment rate doesn’t mean that people are doing well.”

If someone can’t afford a stable place to live, being a human becomes very hard. When there is a disconnect between security and existence, it becomes much more difficult to function. If you aren’t having your basic needs met, you can’t focus on much else.

And that’s damaging. I’ll circle back to this.


The Cost of Production

People worry that if wages increase in the United States, the cost of goods will increase as well, stating that employers potentially have to pass off increases in cost somehow.

But let’s take Big Macs as an example. They’ve already increased in price, without any increase in the federal minimum wage.

  • Big Macs cost ~$4.95 in 2021
  • They costed ~$4.19 in 2013

Assuming each burger takes 3 minutes to make, the cost of labor per burger has fallen from 8.7% to 7.3%, assuming that there has been no increase in wages paid since 2013.

Assuming 3 minutes / burger again, if there is an increase in the minimum wage to $15, that means McDonalds would be paying $0.75 of labor per burger, compared to the $0.36 that they are paying under the $7.25 minimum wage.

Cost of labor increases from ~7% of the burger under $7.25/hour to ~15% under $15/hour.

However, in Denmark, McDonald’s employees make $20/hour. 

But their burgers are only ~$0.65 more expensive than the U.S. burger, costing $5.60. 

Assuming ~3 minutes of labor per Big Mac, that’s $1 of labor per burger, or ~18% of burger cost.

The $15/hr wage in the U.S. is still ~3% cheaper per burger, when compared to Denmark. The New York Times has a piece that highlights the difference between the two countries.

Source: NY Times

I know that comparing Denmark and the United States doesn’t always make sense. They approach the concept of social safety nets and government support very differently. But there is something here – the burger is $0.65 more in Denmark, but workers make $13 more. Considering the U.S. burger has increased by $0.76 – maybe there is some wiggle room in worker wages there too.

We see higher minimum wages in places like NYC and California. In Seattle, the higher minimum wage increase didn’t result in massive employment losses or business shutdowns – rather the opposite.

  • Increased Opportunity: It not only saw new restaurants opening, but also employment in those restaurants soaring (of course, pre-Pandemic).
  • Stable Price Levels: Researchers found “no overall market basket price changes attributable to Seattle’s minimum wage”.
Source: Ritholtz

But the situation is multi-faceted.


The Complexity of the Issue

McDonalds and other businesses do need to keep prices low. That’s their whole model. Businesses can only absorb so much of an increase in cost, because they do have many stakeholders to respond to. Franchises and small business owners don’t have a lot of financial flexibility.

Businesses can’t outprice their customer base.

Many worry that higher costs of production and higher wage costs will outprice products, as well as workers. Workers could lose their jobs because businesses might have trouble affording the increase in wages.

However, these worries are largely unfounded.

The Cost of Products

Most studies show that prices are not impacted by minimum wage increases.

  • MacDonald and Nilsson (2016) note that for every 10% increase in the minimum wage, prices rose by 0.36% (this is a minimal increase)
  • Buszkiewicz et al (2018) found that there was “no market basket price changes” from a increase in the minimum wage

The Cost of Employment

Modest, gradual wage increases actually don’t result in a reduction in employment. As Belman and Wolfson highlight in “What Does the Minimum Wage Do”, a review of 15 years of research around the minimum wage:

There is little evidence of negative labor market effects [from an increase in wages]. Hours and employment do not seem to be meaningfully affected.

The article continues:

While not a stand-alone policy for resolving the issues of low income in the United States, the effectiveness of moderate increases in the minimum wage in raising earnings with few negative consequences makes it an important tool for labor market policy.

There is little evidence of an increase in wages hurting employment, according to Belman and Wolfson’s research. The authors conclude that minimum wage is actually a powerful tool to improve equality and outcomes.

Consensus has broadly shifted from the idea that minimum wage hurts employment to the idea that minimum wage has little to no impact on employment effects.

So what should the United States do?


What are the potential outcomes?

  1. Realizing it’s not a zero-sum game: Providing targeted and intentional assistance is unlikely to create a giant gap somewhere else in the system. If anything, it will create more value down the road, for both the workers and companies.
  2. Upskilling Opportunities for Workers: There are skills that carry over to growing industries, such as traditional manufacturing and hard tech. The connections are there, they just have to be made – and that can compound over time. 
  3. Increased Innovation: Circling back to my first point – if people have stability, there’s no telling what can be created. Rather than worrying about their next meal, they can focus on their creative passions and pursuits.
  4. Improved Health: If people can provide for their basic needs, that’s a huge benefit towards health outcomes.
  5. Targeted Growth: Rather than just paying stimulus (or not paying it at all) these sorts of programs would address problems head on, and pay for themselves over time.

A higher minimum wage is already happening on the local level, which is a good step. But there is work to be done on the Federal level and setting a national standard. Perhaps a flawed example, but just because one state has intense environmental regulations, doesn’t mean that the whole nation is going to benefit from their carbon capture program – it has to be a coordinated effort.

Arindrajit Dube has a strong plan for how the minimum wage could be approached including:

  • Use 50% of local area median wage as a starting point (i.e., Los Angeles is going to have a higher minimum wage than Kentucky)
  • Index wages to increases in regional CPI to capture cost of living changes
  • Encourage coordination among state and local governments

I think often of the paper from ESMT Berlin – “Children who eat lunch score 18 percent higher in reading tests”. Children who have their basic needs met do almost 20% better on their exams. There is also a study that shows if kids have more time to eat lunch, they make better nutritional choices – more time to think, more time to process, better choices are made.

We can extrapolate here.

Stability compounds. Safety delivers returns. Security creates growth.

I realize that this is an extremely nuanced discussion, with value judgements and market measures of utility. There is systemic underinvestment in minority communities, which is where the option for Earned Income Tax Credits (EITC) alongside a higher minimum wage, could further help to supplement.

But it is truly imperative for society to invest in its people. And that begins with a livable wage.


Special thanks to Ashoka Rajendra, Doc Ayomide, Drew Stegmaier, Godiva Golding, Grant Gregory, Kushaan Shah, Jeanette Goon, Joel Christiansen, Lyle McKeany, Rishi Dhanaraj, Ryan Williams, Sasha Leverage, Simon Crawford-Ash, and Steven Ovadia for feedback and review!


Further Reading:

The Video Game Portfolio

The Video Game Market

Reddit user u/DeepFuckingValue turned a $53k YOLO into $11M.

Through GME call options.

Let me explain.

Image
Source: Reddit

What happened with GameStop?

Let’s start from the beginning:

  1. Chewy CEO Ryan Cohen joined GameStop’s Board of Directors
  2. Upon this move, Citron Research predicted that the stock price would drop
  3. r/wallstreetbets decided otherwise

For a bit of historical context, r/wallstreetbets is a subreddit that is self-described as a

Community for making money and being amused while doing it. Or, realistically, a place to come and upvote memes when your portfolio is down.”

The users tend to place a lot of “YOLO trades”, primarily through options.

And recently, they decided to go into GameStop.

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This movement brings up an interesting question: what are so fundamentally interesting about video games? What is the *potential* for video game resellers?

Could video game companies become payment companies? Can video games become currency?

Are video games the next Bitcoin?


Video Game Pre-Orders as Currency

This isn’t the first time that GameStop has been in currency discussions. It has been used as a ‘store of value’ in the past. In 2014, a user posted about their experience with the “First National Bank of GameStop”, explaining how they used the company as a bank.

The set-up of the First National Bank of GameStop:

Does anyone else use Gamestop as a bank?

I got really pissed off with US Bank because I kept overdrafting my account even though I opted out, and the same thing happened with my credit union when I got a debit card.

Now whenever I get paid I go preorder a whole shitload of games. Whenever I need money, I go to the nearest gamestop and ask for my money back on a game I don’t want and make a withdrawal. The lines are shorter at gamestop than at the bank and I can trade in old games and have money go straight to my savings account. Gamestops are just as prevalent as banks in my town and I work at a mall so it’s even more convenient than running an errand to the bank or using an ATM and getting charged.

The gamestop people are starting to catch on that I’m just moving money around and only buying one preordered game a year, if that, but there isn’t shit they can do about it. The best part is, since I always preorder every game coming out I’m still guaranteed to get all the exclusive content whether or not I’m sure I want a certain game. It’s like they’re rewarding me for banking with them.

More simply:

  1. Preorder games = deposit
  2. Cancel a preorder = withdrawal

The whole premise is that the user goes to GameStop, reserves X amount of games, and then collects upon the games before they release. At the time of posting, 2014, GameStop charged no cancellation fees. 

There are apparent benefits to using GameStop as a store of value. It’s quicker and more efficient. However (of course), GameStop is not FDIC insured, is not open 24/7, is not governed by banking regulations, and is not an actual bank.

Obviously, the structure of the First National Bank of GameStop is all hypothetical.

But what if it wasn’t?


A Model: The Video Game Market

What if video game groups incorporated financial services into their current business models? (truly playing into the “Everything is Fintech” concept)

  • Digital currencies: A great way to get access to a digital payment instrument is by having a digital world already set up. Adding a universal currency across games and creating a transaction based environment could be a natural next step. The video game world could operate using its internal system, allowing for P2P transactions.
  • Investment in Creators: Indie game developers could easily become the next influencers, a trend that might conflate with Roblox’s rise. This would further the flywheel that exists within the games, as the digital currencies pay the developers. The Sandbox is another great example of this.
  • Video Games as Assets: They could use pre-orders and game credit as a way to leverage the Fed’s Term Asset-Backed Securities Loan program, as explained by Alex here.
  • Gaming Coins, Verified: Enjin , a game cryptocurrency, was whitelisted in Japan a few days ago. If this is replicated, it could give a lot of leverage to games.

Along the same lines, they could operate akin to Bitcoin, using the video games as a form of e-gold and as an investable financial asset. In fact, video games could go through all the phases that Bitcoin has: a form of payment, a potential store of wealth, and an uncorrelated financial asset.

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Source: Medium, Nic Carter and Hasufly

In this (very) hypothetical world, video games are used as investments – you can buy and sell them on the market, using pre-orders as a way to take stake, based on how you expect the games to perform.


How Could the Video Game Market Work?

This chart below was developed by the team at OSAM Research.

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Source: Patrick O’Shaughnessy

GameStop made $12 on a new sale of video games, and $55 on the first re-sale. They make 4.6x on a first resale, netting $162 in sales versus the consumer’s total expenditure of $210.

And this dynamic creates a market.

A market that users could partake in.

The video game resale market is (somewhat) similar to the secondary market of stocks – it’s a mix of the objective and the subjective, based on company (or game) fundamentals as well as qualitative analysis (is this a *good* game?)

Investors could conduct research on different games, developing a price target for video games (similar to how investors build out valuation for stocks), and choosing to invest based on that metric.

Rather than building a portfolio of stocks, investors could build a portfolio of video games.


An Example of the Video Game Market

Using data from Kaggle, we can begin to build out the potential asset base of investable video games.

The below graph shows the relationship between critic score and user scores for most of the top video games. Most research shows that review scores are the most important variable in video game sales – higher scores serve as a proxy for quality, and thus “purchasing decisions of consumers are strongly influenced by review scores”.

Thus, these review scores are going to be very important in determining a video game investment opportunity.

The larger the discrepancy between critic score and user score, the lower the total sales, and thus, the worse an investment in the game would be. However, if you can capture the upside on a review score, it would be like capturing the upside of earnings and could allow you to resell it at a higher price (all purely hypothetical).

That creates an investment opportunity – capturing the dynamic between critics and users, as well as giving gamers a stake in the resale market.


Investment Techniques: An Example of the Video Game Market 

So then the very hypothetical question becomes, what if you had invested in, say, the Legend of Zelda? 

The Setup: The pre-order for the game is currently trading on the market at $30 – that’s the ‘stock’ price. Critics and Users Scores [earnings reports] are yet to be released. 

  • Let’s say that the assumption was that Zelda was going to get ranked a 10 (max score is 10) by Users. 
  • But the market is pricing that Critics will rank the game at 5.5
  • But you thought there was a chance that the Critics were going to rank the game at 10 [Zelda beats earnings]
  • So you buy a call on the video game price because you think that the game is going to price higher than expected

You think that this game is currently underpriced and it should be worth $40, not $30. You think that everyone is going to love the game and the market isn’t seeing the full potential of opportunity here (hang with me here). 

You buy an out-of-the-money call at the $40 video-game strike price for a premium of $2, which would give you the option to purchase 100 video games at $40 each.

And you were right. 

In this example, the Legend of Zelda completely beat all expectations. The critics rated it at 10, beating expectations by 4.5 whole points.

The price of the game rises to $50.

The call expires in-the-money, with 8 points of intrinsic value (Stock Price – Strike Price – Premium Paid), and you can invest at $40 per game, versus the current market price of $50 per game!

You make $10 x 100 = $1,000 off your trade, and can add Legend of Zelda to your “video game portfolio”. 


Key Takeaways

Perhaps you choose to resell your Legend of Zelda holdings to another market participant and go back into the video game market to invest in another game.

Your core portfolio grows over time, and you can transfer the video games to dollars at any point if you need to withdraw. 

You can invest in developers that you like (directly) and can support in-game universes by taking an equity stake in how they are built. Like a venture capitalist, you help build out different PvP games or different MMO games and are invested in their successes.

The digital environment becomes a flywheel – you invest in the virtual world around you, through the developers and gameplay, and the universe grows overtime. There is a connection and support in the growing metaverse, and an asset class that has been ignored for a long time (video games) becomes a genuinely great place to build a portfolio.


A Simple Conclusion

This is a complex illustration to what is a simple idea – there is a lot of potential for video game worlds to become something really interesting.

Trading video games is something that already happens – GameStop sort of (a big sort of) does what I described above, just not through calls and puts. They purchase games, resell them at a higher price, make a profit, etc.

From a digital payments perspective, we already see a shift with Roblox, Animal Crossing, etc., and there’s no reason why game-based investing couldn’t become another viable option for these universes.

The concept of “build(ing) a human co-experience platform that enables shared experience, from play to work, and learning among billions of users ” as the Roblox CEO stated, involves capturing our entire virtual experience.

One could imagine that it umbrellas some sort of digitized payment-investment-system.

Will it play out as illustrated (with an options market and all)? Probably not. But the concept of overlapping a digital world with a investing spin is pretty fascinating.

Disclaimer: Nothing contained in this article should be construed as investment advice. All information found here are for informational, entertainment or educational purposes only. This piece reflects my own views and ideas.

Special thanks to LouisLyle, and Yishi for helping me edit this piece!

The Calculus Wars: The Power of People

In a letter to Helen Keller, Mark Twain wrote:

“It takes a thousand men to invent a telegraph, or a steam engine, or a phonograph, or a photograph, or a telephone or any other important thing — and the last man gets the credit and we forget the others. He added his little mite — that is all he did. These object lessons should teach us that ninety-nine parts of all things that proceed from the intellect are plagiarisms, pure and simple; and the lesson ought to make us modest. But nothing can do that.” – Mark Twain

“All things that proceed from the intellect are plagiarisms.” Most ideas that have been had, have already been had before.

It feels odd to think that there might be no such thing as “true innovation”. We think of inventors as tucked away in a dark room somewhere, thinking and plotting and prodding, alone in their pursuit of creation.

But so much of the grandiose of invention and discovery is really based in collaboration and competition, the iterations of past science, conversations, and support from outside resources.

Scientific discoveries depend on network effects. Human connections are the underlying current in most of the innovation that we have today.  Discovery is the chaotic storm of many things. After all, “invention has its own algorithm: genius, obsession, serendipity, and epiphany in some unknowable combination”, as Malcom Gladwell says.

It is not the lone genius, siloed away in a study.

It’s humans talking to other humans. But this human element also means discovery is wrought with human error.

In the case of Gottfried Leibniz and Isaac Newton, this human interference, simultaneous discovery, and network effects led to one of the most brutal battles of all time: The Calculus Wars.

Gottfried Leibniz and Isaac Newton

Gottfried Leibniz discovered calculus around the same time as Isaac Newton – but both came to the discovery separate from one another. This was because of shared networks: the two men inhabited the same social circles and were having similar conversations with all the same people.

It’s entirely logical that they would have similar thought patterns.

But this social element of discovery wasn’t recognized by Newton. Newton stamped out Leibniz.

Gottfried Leibniz was many things: a polymath, an inventor, a contributor to binary notation, and a major figure in Philosophy. He also had a series of important friendships and occurrences (some estimating that he had 600+ correspondents), appearing to be almost serendipitous in nature.

This is his story.

The Story of Gottfried Leibniz

Leibniz was born in Leipzig, which was then a part of the Holy Roman Empire. When Leibniz was a kid, he had full access to his father’s library. This unlimited channel of knowledge was a catalyst to Leibniz’s future.

At 14, he went to the University of Lepzig. He defended Disputatio Metaphysica de Principio Individui; based off the principle of individuation. He then went on to write a book, De Arte Combinatoria, in which he argued that a God existed through geometric and cosmological proofs. He also got his license to practice law in the same year.

After all of this, he ended up leaving academia to land his first job in alchemical studies (which he somewhat ironically knew very little about).

The Power of a Hype Man

Leibniz was hired by Johann Christian von Boyneburg. Johann was his first friend and one of the most important. He was politically connected, and introduced Leibniz to Johann Philipp von Schönborn, the Elector of Mainz.

This was a big deal.

Johann Philipp von Schönborn was not only the Elector of Mainz, but also the archchancellor of the Holy Roman Empire.

Leibniz had met one of the most powerful people in the world.

All the while, von Boyneburg was promoting Leibniz and his work, creating inroads and networks that would accelerate Leibniz’s career. In an effort to get noticed by the von Schönborn for a job, Leibniz wrote an essay on law. von Schönborn liked it and subsequently hired him to the court (with the small task of rewriting the laws of the Electorate).

Leibniz made his way up the political ladder. But those plans mostly fell through, as the Franco-Dutch war broke out. So, a dejected Leibniz went to Paris in 1672, seeking purpose.

Make Friends, Influence Yourself

While in Paris, he met Christiaan Huygens, a brilliant physicist and mathematician. After spending time with Huygens, Leibniz became aware of his own shortcomings and began a course of self-study to improve his overall skillset. He discovered calculus in this process (around 1675), developing a complete theory over the course of 2 months.

While in Paris, Leibniz also met Antoine Arnauld and Nicolas Malebranche, the most prominent French philosophers of the day. Through them, he spent more time on the work on Pascal and Descartes, further influencing his knowledge.

He also met Ehrenfried Walther von Tschirnhaus and the two would remain friends for the rest of their lives as mathematical pen pals. Leibniz set out some of his calculus work in their correspondence, and the two built and learned from one other.

The Calculus Drama Begins

Leibniz published his work on differential calculus in 1684. Two years later, in 1686, his second work on calculus was published. He published his full calculus theory in 1693.

At this same time, Newton had published Principia in 1687, which mentioned his thoughts on calculus. Newton notes that he had thought of calculus first, in 1666, while on his break from school during the Black Plague. He didn’t put out any formal work on the subject until 1693.

Things were fine. The two acknowledged one another. They spoke to the same people.

All of that would soon change.

The Power of Community (and intellectual freedom)

Leibniz then traveled to London on official business for von Schönborn and also had a chance to show off the calculator he built. There, he met Henry Oldenburg, an original fellow at the Royal Society, and John Collins. John Collins was talking to all the top minds of the time, ranging from Borelli, Isaac Newton, Wallis, Isaac Barrow etc.

John Collins was a community builder.

One can only imagine the insights that Leibniz gleaned from his time with both (and the insights that that they gleaned from him in return).

However, when von Schönborn died, Leibniz was suddenly left without a job.

Duke John Frederick of Brunswick (the eventual Elector of the Holy Roman Empire) had repeatedly invited Leibniz to Hanover (which Leibniz had ignored). But after getting rejected from countless positions, Leibniz had no choice. He made the trek to Hanover in 1676. And he was there over 40 years.

While in Hanover, Leibniz befriended Sophia of Hanover and her daughter, Sophia Charlotte. Sophia’s line inherited the Royal England throne under the British Act Settlement 1701. Serendipitously, Leibniz now knew some of the most powerful people in Europe. And the both of the Sophias really liked him.

They let him do whatever he wanted while he was at Hanover. During this time, he published 13 works over the course of 4 years.

He published everything in the first scientific journal of Germany, Acta Eruditorium, started by Otto Mencke.

The Downfall

Unfortunately, things went downhill for Leibniz after that.

Commercium Epistolicum was published in 1712, thoroughly accusing Leibniz of plagiarism. Leibniz was never given the opportunity to defend himself. The Royal Society (of which Newton was president) ended up discrediting Leibniz’s calculus in favor for Newton’s. Leibniz and his reputation were crushed.

Leibniz died 2 years later. Only his secretary attended his funeral. No one honored his death. No one respected the life of a man who had given so much to society.

All because of Isaac Newton.

The Power of Networks

The Calculus controversy dampened the last few years of Leibniz’s life. But the thing was, many had already thought of the principles that Newton and Leibniz laid out, including Simon Stevin, Luca Valerio, and Johannes Kepler.

And everyone invented it independently of one another. But also, everyone was entirely dependent on each other.

Newton and Leibniz worked together on power series. They corresponded in several letters about the mathematics that they were working on.

They were all hanging out with all the same people. Logically, they were going to have similar thought patterns and processes. The scientific community was tightly knit, practically an incubator for innovation.

Both Leibniz and Newton had many conversations that heavily influenced them. It makes sense that they both invented calculus at the same time. Just based on the momentum of the era, if they hadn’t someone else would have.

Robert Merton, more eloquently called this the “multiple effect”:

“The discoveries are simultaneous or almost so; sometimes a scientist will make a new discovery which, unknown to him, somebody else has made years before.”

So despite a tragic ending that Gottfried Leibniz did not deserve – we know one thing. Leibniz had many friends that helped him get to where he got, just as Isaac Newton relied on his friends to destroy Leibniz.

Friendships & connections are the key driving force behind most of the scientific discoveries we have. They get us further than we can go alone.

And this power must be used wisely.

The Cost of Love: Appraising The Twelve Days of Christmas

How to get into the holiday spirit? Do some math!

The Twelve Days of Christmas is a Christmas carol that lists out items that a (supposed) lover is purchasing for his love.

The earliest version of the song appeared in a kid’s book titled, Mirth With-out Mischief in 1780. However, the version that we are most familiar with was established by Frederic Austin in 1909.

The gifts are as follows:

  • One partridge in a pear tree
  • Two Turtle doves
  • Three French hens
  • Four calling birds
  • Five gold rings
  • Six geese a-laying
  • Seven swans a-swimming
  • Eight maids a-milking
  • Nine ladies dancing
  • Ten lords a-leaping
  • Eleven pipers piping
  • Twelve drummers drumming

PNC Wealth Management puts together a Christmas Price Index, but I wanted to test some of their methodology. I always wanted to see what it would have costed when the song was first created (which is easier said than done).

I am going to alternate between £ and $ (due to some of the data sources) but the final analysis will compare the two time periods in $.

Key Assumptions:

  • I assumed the 1800s were pretty consistent price-wise across the years, so there isn’t a set year that I pulled all the below prices from. However, everything is adjusted to 1875 prices.
  • I estimated the labor costs to be for 24 hours
  • I used the History of British Birds (Volume I and Volume II) to get the prices for the birds, but William Yarrell didn’t list out all the birds, so I made some educated guesses
  • I used Measuring Worth for all my currency conversions and purchasing power estimates.
  • Also, a note on the money: “Colonists counted their money by the English system of pounds, shillings, and pence — twelve pence (pennies) per shilling, and twenty shillings per pound.
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Source: History of British Birds, Vol 1 and Vol 2

Another note: This was harder than I thought. There might be errors in my bird classifications or my pricing estimates. Sorry in advance, if so!

So behold: the true cost of the 12 Days of Christmas.

Day 1: Partridge (and Pear Tree?)

1875: In the History of Birds, Volume I and II, William Yarrell breaks down some bird prices, but didn’t list partridges.

I am going to have to make (one out of several) educated guesses. Below are the bird prices he did list (in shillings, which are 1/20 of a pound)

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Partridges were not respected and a “prey bird” so I’m estimating it was more of a “moderate sum” of 3 shillings, at most, so ~£0.15 or $0.84 for one partridge.

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Pear Tree: Pear tree data was surprisingly difficult to find. I actually couldn’t even find unit pear data. I’m going to guess that it was ~$0.03/pear, based on these estimates for fruit below.

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Source: NPS

Pear trees produce ~2–3 bushels (1 bushel is ~50lbs of pears per year, two pears are roughly 1lb, so ~25 pears per bushel) so I am going to estimate ~$1.5 worth of pear (50 pears in total), or £0.27

1875 Partridge and Pear Tree = $0.84 Partridge + $1.5 Pear Tree = $2.35

2020:You can buy a partridge from Purely Poultry or you can buy the game from D’Artagnan for $18. I’ll round it out to $25 because the below website feels slightly illegal.

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Pear Tree: You can get a pear tree for about $40 (you can even get one from Home Depot!)

2020 Partridge and a Pear Tree = $25 Partridge + $40 Pear Tree = $65

Day 2: Two turtle doves

1875: I am going to estimate that Turtle Dove’s went for ~5 shillings based on Yarrell’s bird prices above. For two turtle doves, that is 10 shillings in total (10 shillings is half a pound), so £0.5 or $2.8.

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1875 Two Turtle Doves = £0.25 x 2 = £0.5 = $2.8

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2020: Today, you can get the “Little Turtle Dove” for ~$75.

2020 Two Turtle Doves = $75 x 2 = $150

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Source: The Finch Farm

Day 3: Three French hens

1875: The French hen is going to be treated like a chicken in this analysis. The Faverolle is a bit different, but I am going to make the assumption that they traded somewhat similarly to the regular chicken.

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Source: Wikipedia

Chicken costs the same as other fowl, so around 7.5 shillings, roughly £0.375 or $2.10

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Source: FoodTimeline

Confirmation on table birds from Yarrell:

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Source: The History of British Birds

1875 Three French Hens= $2.1 x 3 = $6.30

2020: Chickens are about $60 for 3, or $20 for 1.

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Source: Eggnomics

2020 Three French Hens = $20 x 3 = $60

Day 4: Four calling birds/blackbirds

1875: Songbirds (Sky Lark) were selling for between 12–15 shillings. For simplification, I will say it’s roughly 13.5 shillings, £0.675, or $3.77.

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Source: The History of British Birds

1875 Four Calling Birds= $3.77 x 4 = $15.1

2020: I put a canary for comparison to a Songbird here, because I could not find a Sky Lark for sale. Canaries sing and they were in England during the writing of this song, so I think that meets most of the necessary bird requirements.

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2020 Four Calling Birds= $180 x 4 = $720

Day 5: Five gold rings

1875: Apparently, this was supposed to be the Goldfinch bird. But I am just going to stick with the gold ring. Franklin Jewelry company lists some solid gold rings for ~$1.5 each, or £0.27 (£1.4 for all 5).

1875 Five Golden Riiiiings = $1.5 x 4 = $7.5

2020: It looks like the average ring is ~$5,000 now, but it really depends on several different factors. I am just going to estimate $5,000.

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Source: Verma Estate Jewelry

2020 Five Golden Riiiiings = $5,000 x 5 = $25,000

Day 6: Six geese a-laying

1875: Via BBC:

“According to the 1844 A Christmas Carol/The Miser’s Warning (a theatre adaptation by CZ Barnett of the Dickens novel) the character Bob Cratchit would have spent a week’s wages to buy the ingredients for the basic Christmas feast…That would be seven shillings for the goose, five for the pudding, and three for the onions, sage and oranges.”

Seven shillings for one goose, £0.35, or $1.96. I am going to leave their a-laying eggs out of the equation, because I am assuming that goose + egg hatching are a package deal in this scenario.

1875 Six Geese= $1.96 x 6 = $11.8

2020: Using Purely Poultry again, there appears to be several goose choices, costing $25, on average.

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Source: Purely Poultry

2020 Six Geese= $25 x 6 = $150

Day 7: Seven swans a-swimming

I don’t know how the person in this carol got swans. According to the Smithsonian:

“Swans — who owns them, who breeds them and who eats them — is an issue for the British that has generated legal statutes, sparked courtroom battles and engaged town councils in bitter arguments since the Middle Ages.”

The article continues,

“Swans were luxury goods in Europe from at least the 12th century onward; the Medieval equivalent of flashing a Rolex or driving a Lamborghini.”

Swans were a luxury good. And he just gave away seven of them.

“During the the Medieval Ages, swans were priced at four to five shillings apiece, which was about 3–4x the price of a pheasant and nearly 10x more than a goose.”

I am going to use the previous goose price of 7 shillings as a benchmark.

Total swan cost is roughly 7 shillings x 10= 70 shillings per swan or £3.5, or $19.6

(Also, yes, the Queen is the Seigneur of the Swan)

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Source: Daily Express

1875 Seven Swan= $19.6 x 7 = $140

2020: Florida sold swans for $400 a piece back in October.

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Source: NBC News

2020 Seven Swan= $400 x 7 = $2,800

Day 8: Eight maids a-milking:

According to the 1870 Catalogue of Goods, one heifer cost $18.75. One cow cost $26. That’s a total of $26 x 8 = $208 worth of cows for the maids to milk.

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Source: NPS

For the maids, Chatsworth used to pay their housemaids £20 per year, which is £0.05 per day. Times 8 maids (assuming we pay them their salaried rate), that’s ~£0.4 in maid fees, ~$2.24 in total.

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Source: Chatsworth

1875 Eight Maids a-milking = $208 cow + $2.24 maid = $210

2020: It costs around $3,500 to buy a cow according to Animal Care. For 8 cows, that’s $28k.

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Source: Animal Care

The national average for a housekeeper is $40–80 per hour. Taking the average, that’s $60/hour x 24 hours = $1,440 per housekeeper x 8 = $11,520.

2020 Eight Maids a-milking = $28,000 cow + $11,520 maid = $39,520

Day 9: Nine ladies dancing

Dancers made “$10 per week…(and) also made a commission from the drinks that they sold” in 1885. That’s $1.4 per day (assuming they work 7 days per week).

1875 Nine Ladies Dancing= $1.4 x 9 = $12.6

2020: According to Chron, freelance ballet gigs are between $500 — $1,500 per performance. The estimates for this are a bit difficult, so I am just going to say that it’s $1,500 per performance.

2020 Nine Ladies Dancing= $1,500 x 9 = $13,500

Day 10: Ten lords a-leaping

Robert Hume wrote The Value of Money in Eighteenth-Century England which broke out income brackets across the centuries. It seems that “52 percent of families had income under £25 per annum; 83 percent had income under £50; 94 percent had income under £100.”

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Source: Penn Press

Let’s say that these were somewhat fancy lords, making £100 per annum (also adjusting for the age of the dataset). They make £0.27 per day.

1875 Ten Lords-a-Leaping = £0.27 x 10 = £2.7 or $15.10

2020: I am going to use data from the House of Lords here. Most of the members of the UK’s House of Lords do not receive a salary, but can claim payment for the days that they work, “those who aren’t salaried may claim a daily allowance of £300 for each “qualifying day of attendance” in Westminster.”

If we got these Lords to leap:

2020 Ten Lords-a-Leaping = £300 x 10 = £3,000 or $4,059

Day 11: Eleven pipers piping + Day 12: Twelve drummers drumming

1875: These two combine together quite well. It was very tough to be a musician in London during this time, according to Robert Hume’s work.

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They made 15 shillings per night, taking home “somewhere between £30 and £60 per year.” That’s ~£0.75 per night.

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Source: Robert Hume

1875 Eleven pipers piping = £0.75 x 11 = £8.25 or $46.10

1875 Twelve drummers drumming = £0.75 x 12 = £9 or $50.30

2020: According to PayScale, musicians make ~$50 — $1,000 per gig. Let’s say that they make ~$800.

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Source: PayScale

2020 Eleven pipers piping = $500 x 11 = $8,800

2020 Twelve drummers drumming = $500 x 12 = $9,600

Conclusion: Final Costs + Comparing to PNC

In 1875, everything would have costed ~$520. That’s equal to $12,50today.

At today’s estimates, the whole shindig would cost $104,424. Using this as a rough proxy for inflation would mean that prices have increased 8.35x since 1875!

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There are some people that say that these gifts actually compound — so by the end of the ordeal, you end up with 12 partridges, 11 turtle doves, etc.

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That would bring the total cost to $60,800 in 1875 and $518,337 today!

Here’s how PNC priced it out. 2019 was ~$38k.

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Source: PNC

Here’s how my numbers compare to their 2019 estimates:

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I allocated much more to the Maids (also included the cost of the cows) and much more to the rings.

What a holiday!

Of course, this valuation was prone to several pitfalls, including my own estimates. I hope my appraisal is somewhat accurate, but there are several assumptions that have to be made in order to get this right!

Overall, the holiday season is about more than the tangible gifts we give. It’s normally a celebration of our time with others, but COVID has changed how most of us celebrate. I hope that we all can find glimpses of peace over the next few months, and continually work together to keep each other safe and healthy.

The Why Behind Writing

A less analytical piece today. I have several pieces in the work, so we will get back to ‘Data Data Data’ soon, but this hopefully will answer the question: why does this blog even exist?

Recently, I had the opportunity to participate in the inaugural OnDeck Writer Fellowship (fellow writers, I highly recommend that you apply). I am also a part of the wonderful Compound Community (also highly recommend that you apply).

I had the opportunity to talk on Erik Torenberg’s Podcast Venture Stories alongside Max Nussenbaum and Jake Singer about our experiences writing online.

The last 2 months have brought a range of emotions into my life. As I reflected on my time spent in OnDeck, and my time writing, I wanted to share some thoughts.

I am approaching my 4 year anniversary (December 31st) in this online home known as kylascanlon.com

I have had the opportunity to grow and learn and listen, and the takeaways have been numerous and powerful. This piece is going to talk about my personal writing journey and how you can begin your own writing journey (with little anecdotes from me sprinkled in).

My Writing Story

I was incredibly shy when I was younger, so I wrote as a way to communicate to the world.

I wrote books. One was called ‘The Little Penguin’. I read it to my 3rd grade class. I remember climbing up into the chair, gripping onto the steel on the sides. I opened my book, which was composed of construction paper and notebook sheets, and read. I made different voices for the different characters, and spoke aloud to a big class for one of the first times ever. I was sharing my creation with my classmates. All the fear that I normally felt when speaking was gone – it was just me and the words that I had written.

The Little Penguin was a combination thriller/mystery novel, with Little Penguin on search for his friend, Little Seal. Navigating the seas alone, Little Penguin faced tremendous obstacles and challenges, yet he prevailed.

And that’s life, right?

We go in search of something, we face challenges, but all the while, we persevere. Writing is the art of that perseverance. Writing was how I connected with the world from a very young age, and kept me going when things were not easy. 

I’ve been writing online since I was 19, when Scanlon on Stocks (the predecessor to kylascanlon.com) was a newbie ‘options trader’ blog trying to figure out terminology and trading.

My online writing was an effort to find community, to find other traders and people who wanted to talk about finance (none of my friends were too interested in talking about delta and gamma with me). Writing was one way to reach out to people around the world (many of whom I am now very good friends with). 

Writing is about expression, exploration, and creation. For me, ideas will take up a lot of space, and writing was one way to free myself from their constant nudges and prods. I had to write.

Writing gives me the space to test ideas and find my voice, which is difficult to do. I struggle with severe imposter syndrome and question myself constantly. I don’t think I am overly brave, I’m not spontaneous, I prefer routine and consistency over change – but writing allows me to try new things, to test limits, to change my own patterns. It allows me to challenge my own frameworks and ways of thinking. Each week I write about something different, and I get challenged in comments or emails. These challenges allow me to grow.

This online real estate is a space for me to do fun pieces like Pizza Math or deeper pieces like Kentucky’s Dilemma. I find something I am curious about, and explore it. I share it in the hopes that others will find it interesting or thought provoking, in that way, I can continuously build connections and bridges. Rinse and repeat.

Thank you for reading and for being on this journey with me. I am so grateful that you choose my writing and give me a bit of your time.

Writing is a gift. Below are some thoughts on how you can do it, too.

How To Begin Your Story

“Everything that is possible demands to exist” – Gottfried Leibniz

Pen to Paper: The most important thing is to just write. Write about how the color of the walls, if you need to. Don’t judge the thoughts that come out at first. Just let them be. If you want to publish online, both WordPress and Substack have low barriers to entry.

Give Yourself Time: Somedays, writing is the hardest thing to do. I don’t share most of the things I write, because my blog has evolved into a more analytical, data-heavy blog. But I have pages and pages of thoughts that never see the light of day – and that’s okay.

Give Space to Thoughts: A lot of people have similar baby writer stories. I have noticed that many people will begin writing when something happens, a big event or a big thought. They simply give those thoughts the space to exist. They started writing because something got stuck in their head, they realized they wanted to share this stuck idea with people, and have deep and meaningful conversations.

Share Your Thoughts: We are all in search of some form of community and connection. These online groups provide that, introducing us to people who think similarly and differently. This is a catalyst for growth. The people in OnDeck and Compound specifically want your whole self. They don’t want someone who has a veil over their ideas or constantly hedges against their own thoughts in the piece (I am notorious for this). The freedom to exist as a writer in a space that wants you to grow is an incredible gift. 

Give it Forward: Writing is a way of translating our gifts for the world. Writing is taking what we’ve learned from others and from our own self-reflections and building it into something that other people can learn and self-reflect on. It’s a loop of growth.

Work With Others: Reach out to other writers. I’ve learned so much from working closely with so many good writers (just to name a fraction, Lea, Tom, and Grant; the list is quite long). You can borrow their frameworks and processes and weave them into your own. My own style is wildly inefficient, and I’ve ironed out kinks in my process that have been bugging me for years, just from working with others.

Learn From Others: I’ve met people from all over the world while in these programs. I’ve had conversations on the future of education, the boat market, the concept of death, the reality of our time theory, and so much more. It is tremendous.

Again, Pen to Paper: In the most basic of terms, just write. More complexly, write with others, write with conviction, write often, and write about everything.

How to Continue Your Story

“And when you gaze long into an abyss, the abyss gazes also into you” – Friedrich Nietzsche

Listen: Be open to feedback. We grow when we are open, we grow when we allow ourselves the opportunities to do so. Don’t get stuck in a rut.

Openness: Keep an open heart. Keep your eyes open for other writers. Read their pieces. Edit their pieces, if you have the chance. I have learned more about writing from editing other’s pieces than I have from writing my own.

Trust Yourself: Keep yourself centered. Turns out, self-doubt can creep between the words we speak and write. Confidence carries itself within the sentences of our pieces, and can make the difference between impact and garbage. Believe in yourself. Believe that you deserve to write.

Read a Lot, but Think Even More: Reading other people’s work is the best thing that you can do. It helps orient you to their structure, their processes, their framework – all of which you can translate to your own work. When you read, think about your own writing. What do these words mean to you, what does the path mean to you, and how does it all tie together?

How to Grow Your Story

“The world is, of course, nothing but our conception of it” – Anton Chekhov

Humanness: I think that communities are the most beautiful part of being a human. The idea that we can connect with our fellow people so deeply, on a variety of topics, is so special. OnDeck and Compound both served as an anchor for me. I didn’t feel like a star orbiting in a distant galaxy; rather I felt like a planet, lined up with others, in a phenomenal solar system.

Anecdote: I remember ending one of our writing workshops in OnDeck. I had gotten feedback on a piece that I had written about Kentucky, my home state. As some of you know, I moved to Los Angeles a year and a half ago all by myself, and the journey has been ~interesting~ to say the least. I had written something personal, but the group encouraged me to get even more personal. I had people reach out and tell me that they loved the piece, that I deserved to take up space, that my voice needed to be heard. And it was a moment I will never forget – feeling so supported, so surrounded by care. It was powerful in carrying me when I needed it most, and encouraged me to speak, even when it might be difficult.

Sharing is Power: When we give power to our voice, and others carry us along, that translates into something meaningful and special. We are social creatures, and we should give ourselves the gift of being with our fellow Humans as much as possible.

A String of Adjectives: We crave community in an increasingly polarized and disconnected world. Connection. Care. Thoughts. Sharing. Vulnerability. It’s all something that I’ve experienced over the past few months, and will continue to seek out. These groups, and most importantly, writing online, have been so influential in shaping how I go about my life. We are only here for a short amount of time, why not connect with the people we share our marble Earth with?

If you have any questions about beginning your own writing journey, please reach out. I am always happy to chat.

Pizzmathematics: Which Pizza is Truly the Best?

An age-old debate still rages: Papa John’s or Domino’s?

This piece won’t be a qualitative answer to the above question, but rather, a quantitative one.

I recently did a chicken nuggets math piece, breaking down exactly how much chicken is in a chicken nugget. I wanted to do the same for pizza. I went to Domino’s and Papa John’s websites to get their menu data to utimately answer:

Which pizza is the best pizza?

Why should you care? Well, pizza is the favorite food of most Americans. (Author’s note: I do not eat pizza, just fascinated by food math). We should understand the nuance behind these favorite foods and if pizza is your favorite food, you should eat the best pizza!

Below is our breakdown for calculating our pizza allocations:

Pizza = Crust + Sauce + Cheese + (Pepperoni)

There will be a comparison of surface area, pizza composition, density of ingredients, and price, to determine: what is the “best” pizza?

The article below is broken down as follows:

  • Size
  • Crust
  • Sauce
  • Cheese
  • Pepperoni
  • Prices
  • Parting Thoughts

(Also if you’re interested in this dataset, I built it from here and here and can send along!)

Choose Your Fighter: Domino’s vs. Papa John’s

The below pi*r^2 equation is used to calculate the surface area of the pizza (throwback to geometry!).

Figure 1: The Surface Area of Pizza, Piesanosvt

In Figure 2, the two pizzas are displayed side by side: we can get to the surface area through the equation in Figure 1. Domino’s has the same servings for their M – XL pizzas (8 slices) but Papa John’s has a 10-slice serving for their XL.

The pizzas are the same by surface area. However, the Medium pizza is 44% bigger than the Small (and is probably a better deal) confirming work done by others in pizzathematics.

Figure 2: Comparing Cheese Pizzas

The Crust Contribution

This is a breakdown of the crust for the two cheese pizzas. The Papa John’s XL pizza is extremely heavy and very dense, with the total crust weighing 1,330g versus Domino’s 728g (2.9 lbs vs 1.6 lbs for non-metric system users). This gives Papa John’s ~45% more crust allocation; see Figure 3.5 for further ‘explanation’. All of these data are from the menus linked in the first section.

Figure 3: Comparing Crusts

There is also a metric called “dough density” which is the dough weight divided by the number of square inches on the pizza. This give an idea of the crust appearance, texture, and breadth. (I will repeat this metric across all the ingredients to measure true thickness).

Strangely enough, the Papa John’s pizzas actually tend to have less crust as compared to their Domino’s brethren, as we can see in total crust density – they are ~0.05 less dense, on average (except in that weird XL pizza).

(Figure 3.5, An Aside: Why is the Cheese XL Papa John’s Pizza so massive?)

In absolute and percentage terms, it’s the same story. The Domino’s Small Cheese Pizza has 96% more crust as compared to the Papa John’s pizza. The Medium and Large pizza have 65% and 68% more crust, respectively. However, nothing compares to the outlier – Papa John’s XL simply has a ton of crust.

Figure 4: Absolute and % Crust Comparison

But as in life, there are crusty tradeoffs.

Referencing Figure 3 again, we can see that there is much more consistency across the Domino’s pizza sizes, with crust density ~0.13. Papa John’s has much more variance in density, ranging from 0.07 all the way to 0.23. A less consistent pizza experience could be troubling to some.

Figure 5: Crust Weight Distribution

Based on this analysis, it seems as though Papa John’s might be the less crusty of the pizza duo. But what about the rest of the ingredients?

The Sauce Share

Papa John’s loads up on the sauce. Their sauce density is the highest on the L pizza, at a whopping 0.07 – however, once again there are tradeoffs, especially when compared to Domino’s much more consistent sauce distribution across the pizzas.

Figure 6: Comparing Sauce

Papa John’s has ~40% more Sauce than Domino’s does, on average.

Figure 7: Absolute and % Sauce Comparison

Quite… saucy.

Figure 8: Sauce Weight Distribution

Now, for the most important part, specifically for the cheese pizza connoisseurs.

The Cheese Contribution

The cheese distribution clearly favors Papa Johns. They have 506g of cheese on their XL pizza! Their cheese density is surprisingly consistent as well, ranging from 0.08 – 0.10.

Figure 9: Comparing Cheese

But here, we have a clear takeaway when referencing Figure 9 above- if you want the DENSEST cheese experience, you have to choose Papa John’s Medium Cheese Pizza. There is no other choice.

As we saw, on a percentage basis, Papa John’s has much more allocation to sauce, relative to Domino’s. But that doesn’t mean that they can’t have more cheese too! The Medium Papa John’s gives you 30% more cheese as compared to Domino’s.

Figure 10: Absolute and % Cheese Comparison

Relatedly, the government apparently has an underground cheese bunker. Maybe that’s where all this cheese is coming from.

Figure 11: Cheese Weight Distribution

What about other toppings?

BONUS ROUND: The Pepperoni Portion

I personally do not eat pizza (a byproduct of veganism) but I have been informed that Pepperoni pizza is a “must-have” amongst pizza lovers.

So which pizza company has the most populous percentage of pepperoni placed per pizza?

See below, Figure 12. Both companies had the exact same amount of pepperoni density.

Figure 12: Comparing Pepperoni

However, Domino’s has much more pepperoni per pizza than Papa John’s. Once again, the Medium pizza is a winner (this time, in Domino’s favor). The Domino’s pizza has 29% more Pepperoni when compared to the parsimonious-pepperoni pizza chain known as Papa John’s.

Figure 13: Absolute and % Pepperoni Comparison

Price by Part

So which one is the best deal? This breaks down the whole thing into weight, and calculates the price allocation across ingredients to the penny.

Cheese-Only

Based on sheer weight, Domino’s is the heaviest pizza (except for the XL). For the Medium 12-inch, you get a solid 744g of pizza. Papa John’s is close behind, weighing in at a stocky 728g. For the XL, Papa John’s has an enormously heavy pizza, for reasons I can’t quite understand and have highlighted throughout this article (see Figure 3.5, as discussed previously).

Figure 14: Pizza Weight, Cheese

But of course, the parts matter more than the whole.

Papa John’s offers the highest percentage of cheese across all the cheese pizza sizes as shown in Figure 18 – but Domino’s bests them in the XL category by ~6% cheese allocation (surprising, considering how massive Papa John’s pizza is).

Figure 15: Pizza Weight %, Cheese

We can see that Papa John’s consistently has the most cheese (with the Medium pizza giving you the most pizza for your cheese buck) but Papa John’s is also more expensive (government bunker cheese comes at a high cost, after all).

As illustrated in Figure 19, for the $14 Medium Papa John’s Cheese pizza, you pay ~$6 for cheese. About 42% of the total cost. Compared to Domino’s, where you pay ~$3 for cheese on their $10.99 pie, which is ~29% of the total cost.

(Disclaimer: this is probably not how their pricing structure works, illustrative purposes only).

Figure 16: Pizza Price Breakdown, Cheese

What about pepperoni?

Most of the pepperoni sizes weigh the same as the cheese sizes, as shown in Figure 20. The Small pizza does weigh slightly more and this Papa John’s XL is much more reasonably sized.

Figure 17: Pizza Weight, Pepperoni

But which one is a better deal?

If your goals are to get the absolute most pepperoni possible, Domino’s is the best. But if you want the most toppings – Papa John’s wins, with more than 1/3 of the pie being devoted solely to the top of the pizza (not including sauce).

Figure 18: Pizza Weight %, Pepperoni

Price-wise, Domino’s and Papa John’s tie in terms of pepperoni cost for both the Medium and Large pizzas.

Figure 19: Pizza Breakdown, Pepperoni

Final Parting Pizza Thoughts

Here is a graphically eloquent way to look at the pizzas:

Papa John’s has the least amount of crust allocation, with a heavier emphasis on sauce and cheese (except for the XL).

If you really like cheese on your cheese Pizza: Papa John’s is the best choice. Domino’s gives you bigger pizza for less money, but most of the pizza is crust. (with that being said, if you really like crust? Dominos.)

Figure 20: The Cheese

For pepperoni, it all depends on your goals. If you want a cheese/pepperoni ratio that is somewhat reasonable, Domino’s is the best bet. But Papa John’s comes in swinging with very little crust and very much cheese (just look at that Medium pizza).

Figure 21: The Pepperoni

I won’t talk about calories or fiber or micronutrients, but those are all important things to consider as well.

Overall, I can’t tell you which is the best. I can only give you the tools to decide for yourself.

But as with all things, we must make decisions – more cheese or more crust?

Life is a series of choices and ultimately is a process of tradeoffs. Choose wisely.

Thanks for the Kilo Workshop team and fellows in the Compound Writing group for their editing prowess 🙂