Investing in the Sharing Economy

The rise of the Sharing Economy will change the way we think about personal investment portfolios. This essay will explore the dynamics of personal investing, the nature of the Sharing Economy, and the relationship between the two.

First, what is a personal investment portfolio?

A personal investment portfolio is just stuff that you own that will hopefully earn you money

These portfolios are mostly comprised of equity investments. It’s also common for them to include debt investments, but this essay will only be addressing equity. The most common form of equity investments are stocks, which is why some people use the terms “investment portfolio” and “stock portfolio” interchangeably.

It’s pretty easy to get started investing in stocks.

Robinhood is a zero-fee stock-trading app that is now worth more than one billion dollars. On April 26th, the company announced that it had raised a $110 million Series C at a valuation of $1.3 billion led by DST Global. Robinhood’s zero-fee business model, mobile-friendly technology, and modern, simplistic approach to investing has attracted more than 2 million users. The company’s success is just the latest example of how easy and commonplace it is to own and manage a personal investment portfolio.

When you buy a stock, you are buying ownership in a company. Let’s say you own nine shares of Apple Inc. (AAPL), which is currently trading at $155.36–your equity stake in Apple is worth $1,397.34. The company has a market capitalization of approximately $810 billion (5,213.8 million shares outstanding × $155.36). So you own somewhere in the neighborhood of 0.000000002% of Apple. Try not to let the power go to your head. The company’s management team has control over the company, but because you’re a partial owner you will benefit when the company does well.

Generating returns on your ownership

There are two primary ways to generate returns on an equity investment: value accretion and dividend payments.

  1. Value accretion occurs when an investment gains value over time. As the investment grows more valuable, the price of an ownership stake goes up. This is the concept behind the adage “buy low and sell high”.
  2. Dividend payments are a distribution of a portion of a company’s earnings to shareholders. Unlike value accretion, dividend payments don’t necessarily have anything to do with the investment growing more valuable; the company is simply giving cash payments to shareholders in proportion to the number of shares they own.

Depending on the nature of a public company, its stock might be informally classified as a “growth stock” or a “dividend stock”. Think of Tesla (TSLA) and Snap (SNAP) as examples of growth stocks. Although the companies aren’t profitable yet, people are willing to pay big premiums for ownership because they expect the companies to be much more valuable in the future. Compare those companies to American Railcar Industries (ARII), a company that manufactures, services, and leases railcars. The business certainly isn’t sexy. It doesn’t have the possibility for explosive growth. However, it does have a history of consistently making money and paying a large portion of it out to shareholders as a dividend.

These two styles of generating returns have different strengths and weaknesses. Value accretion is usually riskier: paying a premium upfront for the possibility of radical expansion is an exercise in uncertainty. It’s quite possible to overpay for growth that never materializes. However, the upside is undeniably higher. In 2004 many investors thought Google’s stock was overpriced: “It might be worth $70, but not $90.” Today the stock is trading at $940.

Dividend stocks have lower ceilings than growth stocks, but they come with a higher degree of certainty. Because the companies have established track records and high visibility into future cash flows, investors can have greater confidence about the returns they’ll receive.

Other equity investments in a personal portfolio

Not all equity investments are in the stock of public companies. Too often, people get lazy and use “stock” and “equity” synonymously, as if there were no other types of equity investments. In fact, many people have at least one other large equity investment in their personal portfolio: their house.

Remember that an equity investment is just ownership. So if you own a house rather than renting an apartment, you have an equity investment in your personal portfolio. Similar to how shares of Apple give you a percentage of ownership in the company, you can think about your house giving you a percentage of ownership in your neighborhood. If the value of the neighborhood goes up, the value of your house will follow.

Unlike a business, your house doesn’t earn money and can’t pay you a dividend. However, you can still realize a return on your investment through value accretion. Investing in a house comes with risk and uncertainty, just like a growth stock, but it also presents the possibility of “buying low” and “selling high”.

This dynamic also applies to other large purchases. You can think of owning a car or a boat as an equity investment. If the demand for your type of car or boat goes up, you’ll be able to earn a return on your investment through value accretion.

The Sharing Economy

The phrase “Sharing Economy” pops up in tech-related articles more frequently than the combined instances of “collaborated”, “synthesized”, “executed”, and “analyzed” in a consultant’s résumé. It’s hard to pin down definitions for tech-media buzzwords, but here’s an attempt to define the Sharing Economy:

The Sharing Economy noun: a wave of new market activity brought on by businesses which–by improving technology, reducing transaction costs, and leveraging the new wealth of data about people and things–have allowed physical assets to be disaggregated and consumed as services

This idea will have a dramatic impact on how we approach personal investing–especially that last bit, “disaggregated and consumed as services.”

However, people haven’t started thinking about this new market activity in the context of investing because the Sharing Economy’s most immediate effects have been on consumer behavior. Think about Uber: the company has reduced transaction costs and leveraged data in order to provide a fleet of cars that people can consume as a service. Companies like Uber are giving consumers unprecedented flexibility, and fundamentally changing the way that we think about asset ownership. More and more people are opting out of buying cars because of the flexibility that Uber provides them. What was previously a significant equity investment can now be consumed as a service.

The Sharing Economy will change the current understanding of a personal investment portfolio

I said earlier that “your house doesn’t earn money and can’t pay you a dividend.” I lied. I’m sorry. But that’s how people used to think about home ownership: you buy a house, and then you hope that the property value is worth more in the future. The only way to earn a return on your investment was through value accretion.

The Sharing Economy changes that. Airbnb allows the physical asset of your house to be consumed as a service. This is similar to receiving dividend payments from a company. The shareholder (you) receives dividends (rent payments) from the operations of the investment (people using Airbnb to stay at your house). Suddenly, you have a greater level of certainty about the types of cash flows you can receive from your investment in a house.

Imagine that you’re buying a vacation home on the beach. Under the previous model, you make a significant equity investment in the property knowing that you will be able to derive occasional value from it by staying there on vacation, and hoping that you can generate a return on the investment through value accretion (i.e. vacation homes on the beach will be more expensive in the future and you’ll be able to sell the house for more than you paid for it). There are a few drawbacks to this model. The first is that you don’t have much insight into your return on investment. You’ll do as much research as you can on the neighborhood, the historic trends of home prices in the area, etc., but at the end of the day your return on investment is going to come down to a single sale event. The second drawback is the inefficiency of the investment. You’ll probably only use your vacation home a few times a year, and lend it out to friends and family a few more times on top of that. The rest of the year it’s gathering dust.

The new Sharing Economy model removes both the inefficiency and the uncertainty. Before purchasing the vacation home, investors can estimate how much they will be able to earn by listing the new property on Airbnb. Instead of the home sitting idle during the year, the equity investment is put to use and the investor earns dividend payments. This provides a floor for the investment; “I know I can earn a return of at least X just based on dividend payments; any value accretion on top of that is gravy.”

Homes aren’t the only equity investments transformed by the Sharing Economy. We already mentioned Uber, but an even better example of a company applying the principals of the sharing economy to cars is Getaround. The app allows you to rent out your car to a network of peers when you aren’t using it. Rather than letting your car sit idle all day in the company parking garage, you can list it on Getaround and earn dividend payments on your equity investment. Boatbound is a similar service for boats. The enormous upfront cost of a boat–an asset used infrequently throughout the year–can now earn predictable cash returns. These companies are changing the economics behind the purchase of large assets.

Inefficiencies in our personal investment portfolios

Recall that the recipe for the Sharing Economy is: new technology + reduced transaction costs + big data + a network of users + inefficient owned assets. This recipe gives consumers flexible asset usage–the ability to consume large physical assets as services. Investors receive dividend payments on inefficient equity investments. We’ve only just begun to see the impact of the sharing economy–as technology progresses, and costs go down, and big data expands, and the network grows, the set of objects that qualify as “inefficient assets” will balloon. And this will have a very cool effect on our personal investment portfolios.

Right now, investors are asking the question: “Can I earn a good return on my equity by investing in this company?” The early stages of the Sharing Economy have added: “Can I earn a good return on my equity by buying this house or this car and plugging it in to the Sharing Economy to receive dividend payments?” The later stages of the Sharing Economy–brought on by even larger sets of user data and even lower transaction costs–will add: “Can I earn a good return on my investment by buying a closet full of designer clothes that I like and believe will be in high demand, plugging those purchases into the Sharing Economy when I’m not wearing them myself, and earning dividend payments on my investments?”

Let’s say you really love surfing. You’ve been eyeing a new high-end wetsuit that’s, like, totally rad, but it’s pretty expensive and you’re not sure if it’s the best use of your money. You work as a bartender Wednesday through Saturday, and you surf Sunday through Tuesday. Taking advantage of the Sharing Economy, you decide to invest the money in the suit upfront and rent it out on the days that you’re working. You get to enjoy a top-of-the-line wetsuit Sunday through Tuesday, and Wednesday through Saturday you’re receiving dividend payments from tourists that don’t want to buy their own suit. The technology platform you’re using makes logistics, shipping, and payments totally effortless, Bro, and those costs only make up a small percentage of what you charge each day for the suit. After a few months you’ve earned your money back, and everything you earn from then on is a positive return on your investment.

Playing to your strengths

People are afraid to start a personal investment portfolio because there’s all this crap you have to learn before you can feel comfortable: Income Statements, Balance Sheets, Free Cash Flow, P/E Ratios, Average Daily Volume, P/B Ratios, Debt Schedules, Dividend Payout Ratios, etc. But the Sharing Economy will enable people to play to their strengths. Things that they’re passionate about can be added to their investment portfolio, and investment decisions will be driven by a balance of personal usage and cash returns.

Interested in high fashion? Add some to your portfolio. Then you can diversify with rock climbing gear, expensive cameras, a bike, and a home-brew kit. When you invest in things that you’re passionate about, you’ll have a better sense than anyone else of what makes a smart investment. How much will people be willing to pay to use it? Which items will retain their value over the long run?

How do we get there?

We’re still a long way off from stylized personal investment portfolios driven by the Sharing Economy. People are just now starting to get comfortable earning dividend payments on their houses. The costs of shipping and logistics are still too high for most of the ideas proposed in this essay–the combined costs of locating a tourist in need of a wetsuit, facilitating a transaction, transporting the wetsuit, and supporting the necessary technological infrastructure would cost more than most tourists would be willing to pay for a day-long wetsuit rental. However, there’s no reason to think that that will always be the case. As technology and analytics improve, those costs will continue to fall.

Entrepreneurs are incentivized to build companies that work within this trend. After the wild success of Airbnb, we’ve seen a number of companies spring up billing themselves as “Airbnb for X”. Many of those companies will fail, but they’ll do their part in trying to bring that functionality to all of our equity investments. When they succeed, it will blur the lines between our lifestyles, passions, and personal investment portfolios.

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