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  • Writer's pictureJames W

property rights and investing

I talk about the importance of Property Rights and the varying degrees of investment vehicles. (Not literally Porsche 911s). I hope by the end of this blog, you start giving a sh#$ about considering Property Rights around your investment thesis.


 

There are many different investment classes such as:

  • Equities (Stonks)

  • Real Estate

  • REITs

  • Businesses (Corps)

  • Venture Capital

  • Land

  • Art

  • Bonds

  • Commodities

  • Gold/Silver/etc

  • Crypto

I recall in 2008, driving around San Jose seeing many different office buildings vacant. The mortgage backed security crisis led to a huge cluster fuck and decade long recession that we see repeating today. I reflect upon this moment through genuine curiosity to understand the risks of investing. The conclusion of Property Rights is vastly understated for the reasons below.





While movies such as The Big Short or Margin Call explain the crisis in a rudimentary sense. Prior to 2008, it was very easy to apply for a mortgage. There was a term called "NINJA " loans which stood for No Income, No Job, No Asset loans. I remember going to see my mom's friend that operated as Mortgage Officer. It was permittable practice to allow the Mortgage Officer to sign documents on behalf of the lendee. (Yikes!) These mortgages and sold from bank to bank and establish a string of cash flows through bonds which can be invested in. Through gluttony and poor due diligence, we saw the grade quality of bonds misrepresented which led to a series of foreclosures. CDOs or collagenized debt obligations were "leveraged to the tits." Assets were rehypothecated to the point where no one knew what they owned and the court system was left to figure out who owned what collateral.



 

The gamestonk debacle

In the past year, 2021, $GME or Gamestonk and other meme stonks unleashed a retail investment frenzy on the market. Due Diligence by /u/deepfuckingvalue was posted on Reddit who pointed out that the amount of shorted shares exceeded the total available float. Truthfully, I didn't believe Gamestonk was going to do well when the pandemic hit but their financials were still strong. Same with AMC theaters. It was a rational belief that retail stores for games would disappear or at least have a significant portion of market share be decimated by Steam, Amazon and other online providers. What seemed to be controversial was the removal of the Buy Button for certain stocks like $GME which caused the price of the share to plummet. This helped hedge funds limit their exposure in buying back stocks. Most recently, Citadel Securities began filing for SPACs daily in the last year or so. Through their 13-G filings and further investigation, it is blatantly obvious that Citadel is purchasing Pre-IPO shares for pennies on the dollar and converting them to Class A stocks which are worth more. This creates an artificial inflation on the balance sheet, which is used as collateral for covering their short positions. This is money being printed out of thin air. If this does not piss you off, I don't know what will. 2008 was not any different from what we are experiencing right now.


Marketcap is a vanity metric that is calculated by price of last sold share multiplied by total shares available. In reality, profits from the company rarely go back to shareholders. You are not buying a string of cash flows but rather you are making your money based on a maker-taker relationship. How much is this person willing to sell and how much is this person willing to purchase the share for? Sure dividends can be done but that is usually a very small % of net operating income.




You may not know this, but when you invest in equities through Robinhood, Fidelity, Vanguard or some type of equities exchange, you do not own the actually STOCK. Have you seen the stock certificate titled under your name? You need to transfer custody of your stocks to a DRS (Direct Registration System). There are dark pools. Additionally, if a company tried to an accounting and reconciliation of shares outstanding, it is unknown how many shares have been actually issued.

In a meeting, SEC Chair Gary Gensler commented:

“[We are] seeing a great deal of concentration, really found around this small handful of market makers that are buying a significant portion of the retail activity in the US. And we have approximately half of our market now not going to the lit exchanges; they are going to the dark pools and the wholesalers (who are also dark). So there are some inherent conflicts.”

So maybe you own shares of MSFT, TSLA, VOO, SPY, or some other exotic ETF. How would you feel if the retail investor lost confidence in the integrity of equities which caused the market to sink How would you feel finding out, that because you didn't DRS your equities, there is a possibility you might end up with nothing. Why do we have dark pools? Dark pools are a securities exchange that is done off-market, usually involved larger traders - which may or may not have "custody" over your shares.


In short, what the F&*#% is going on?!



 

Shares of Companies like REITS, C-Corps, LLCs etc


Imagine a situation where shares need to be accounted for, only to find out you didn't technically own the actual share of the company. Your fiduciary, such as Robinhood, is leaving the consumer bagholding the difference. Hence, the importance of Property Rights.


Bearer Shares are similar to DRS but instead of a central database handling the registration, the registration of the share is based on who owns the actual piece of paper. While less common today, this is really the best way to secure your Property Rights as an investor of a company. The recent release of the Panama Papers has definitely called into question the legality of Bearer Shares.



 

Real Estate Investing


The reason I love Real Estate investment so much comes down to Property Rights. The deed of trust states the name of the owner and is verifiable by the county recorder. While not standardized across all counties, county recorders provide this information digitally or have vast archives dating back to the 1800s. While investing in America or other 1st world countries is relatively secure, serious consideration needs to be given when investing overseas.


I recall a story being told to me of an individual having actual bearer shares of a property overseas in a Latin American Country. Five armed men muscled their way into the property and told the owner to leave. Through legal council, this individual discovered that the attorney took advantage of the situation and assigned the property ownership to himself. What a mess! Property rights is really important but can only be enforceable in a country with a strongly trusted legal system.


There has been so much common law developed over the rights of property such as Real Estate. There is much text, precedence and cases that have built upon each other to develop Property Rights in the areas you are investing specifically.


It is entirely possible for custodial services to fail with equities and shares of a company. It is entirely possible for your real estate property to be taken away from you by eminent domain or acts of hostility and aggression.


My father used to own a Pharmacy in San Jose located in the Tropicana shopping center. The city wanted to claim eminent domain to redevelop the area. You can read more about eminent domain being used in San Jose, California here. I will one day write about the history of the shopping center; it is the most fragmented ownership of property in San Jose. Imagine owning a business here, only to be kicked out because the City wants to redevelop the land you work on.





 

Commodities, Art and Derivatives


Commodities are quite interesting. If you did not know this, onions are not tradable as a commodity under the Onion Futures Act. In 1955, Siegel and Kosuga purchased a ridiuclous amount of onion futures where they controlled 98% of available onions in Chicago, Illinois. The supply was mickey moused and misrepresented to investors. Onions would be reconditioned which made it seem there was an excess of onions. Supply and demand tells us that an oversupply of something would lead to lower prices. Guess who took a short position? Yup, Siegel and Kosuga. Hence the Onion Futures Act. In 2010, an amendment was made to include future contracts on motion picture box office futures thanks to the Motion Picture Association of America. What good are property rights if your underlying asset is subject to manipulation?


Art is pretty interesting. You can own fractional portions of art, which is held by custody with a fiduciary. Anytime a fiduciary is holding custody of an asset for you, under the guise of safe keeping, you really don't own the asset. No amount of recourse will help if your fiduciary files for bankruptcy and your asset goes missing. The birth of NFTs is interesting but has called into question, does the holder really own the art? Under the Fair Use Act, freedom of expression allows unlicensed use of copyright-protected works in certain circumstances. Right click, eliminates your property rights to a specific serialized art. Most art will be stored and held through customs or international port but never received, which eliminates the taxation on a good, not actually received.



 

Bonds


Bonds are shit as of time of writing. So I am not even going to bother discussing it. Yes T-Bills are 100% guaranteed back the US of A. What happens if our currency gets debased?



 

Crypto


I talk about crypto repeatedly like a crazed maniac. The biggest attraction - for me, is the Property Rights surrounding crypto. Bitcoin, in particular, has no admin keys, a set amount in circulation, a decentralized verifiable ledger and can not be inflated by a central "government." Crypto has by far, better property rights than any other asset class. The only way to lose your crypto is by disclosure of public keys (which is essentially a cryptographic password which controls your wallet), or someone holding you at gunpoint and demanding a transfer from your wallet to theirs. (I don't recommend telling people what you own or what you have).


When I talked about commodities, I mentioned - what good are property rights if your underlying asset is subject to manipulation. Crypto is inherently volatile. The introduction of Decentralized Finance has changed the way money can be looked at. It can be speculated that whales fluctuate and move pricing; however much of the volatility is because users are allowed to take leveraged positions of 100x. Margin calls lead to liquidation which leads to a sharp decrease in pricing. The biggest thing to consider, is that for the first time, there is a decentralized way of transaction store of value. Bitcoin fails as a medium of exchange, or digital cash, at the moment due to high transaction fees and low throughput. It's slow. The blockchain trilemma is security (decentralization), speed and scalability. No single entity manages the distribution or control over the blockchain. It is completely equal to all participants.


For the first time ever, you have a way of transacting a 'store of value' that is free to the open market and can not be inflated to fight wars, print ones way out of debt and not subject to judgments, liens, foreclosures or seizure. Getting a judgment through American Civil court would allow you to collect assets of the debtor. It is difficult to seize Cryptoassets because the only person that controls the wallet is the user. They get the last say, who gets to have their "digital assets."



The concept and idea of digital assets sounds silly on face value. Admittedly, NFTs are a little bit ridiculous since there are no property rights that surround it. Everything is 'fair-use' to an extent. However, a nonfungible tokenization of certain events such as UCC filings, Liens, Mortgages really attract the usage of a blockchain system. There is no "double-spend" that can arise. With physical art, you have the ability to destroy, consecrate, draw over it, have the intellectual property rights of the imagine; so on and so forth.


Bitcoin offers a property option that does not rely on a local authority or legal system to enforce or protect it. It is secured by the natural incentives of participating in the network.


Crypto can be used as collateral for mortgages, loans and other investment purchases. They do not require credit checks and same-day funding -I dare say same-second funding can occur. It is unusual for a digital asset that has property rights like this.


Wyoming State has been leading the legal development of Bitcoin and other cryptoassets. On a state level, the yhave exempted Bitcoin and other cryptocurrencies from transmitter regulations.

Additionally, they have recognized DAOs which are Decentralized Autonomous Organizations to be legal entities in owning businesses. How cool is that! Wyoming is also the first to offer a banking charter for DAOs.


I recently came across a post in Seattle of a DAO that is establishing a coffee shop in the local area. How cool of a concept to be able to own a coffee shop or business that has no defined owners.




None of my commentary should be considered as financial advice. However, please consider Property Rights as an issue when making investment decisions. Do you have full trust over the custodian of you investments or assets? Is it subject to recoupment, theft or judgments?


In a future post, I will highlight a few projects that are of interest to me. I discovered a project that mimics Certificate of Deposits, like the traditional banking system. Time and delayed gratification play a huge component on how value is transacted and approached by this ecosystem.



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