Fremont vs Los Gatos vs Palo Alto high schools

•  Mission San Jose and Irvington's dominance holds over Los Gatos and Palo Alto high schools. Mission and Irvington average 50+ kids to Berkeley, a number which none of the Los Gatos, Saratoga or Palo Alto schools come close to
• Mission's dominance in one statement : over the last 5 years, Mission San Jose kids got 292 admission offers from Berkeley which is close to Los Gatos + Saratoga combined(308). Irvington is not far behind with 244. 
• In 2018, Irvington high alone got similar admits to Berkeley(57) than entire Los Gatos Saratoga Union high school district (58) (Los Gatos high and Saratoga high combined)
• In 2020, Irvington high alone got more admits to Berkeley than entire Palo Alto unified school district (Palo Alto high and Henry Gunn high combined)
• Among Henry Gunn, Palo Alto high, LG High and Saratoga high, only Henry Gunn crosses the 5 year average 40 mark
• Los Gatos and American high numbers are very similar over the last 5 years
• Saratoga and Palo Alto high numbers are very similar over the last 5 years 

Fremont vs San Jose public high schools

• Irvington and Mission - Fremont's top 2 seem to be in a different league compared to San Jose public high schools - averaging almost 50 kids to Berkeley every year
• Mission San Jose's dominance is clear as it got similar kids accepted to Berkeley as Evergreen and Leland combined did
• Irvington's dominance is clear as it got similar kids accepted to Berkeley as Evergreen, Leigh and Branham combined did

• Evergreen(26.2) and Leland(29) are top 2 in San Jose and average close to American High(27.6) in Fremont
• Washington(Fremont) and Milpitas High are the up and coming schools closing on the 20 mark
• Other public schools in San Jose are around the 10 mark. This includes Leigh high, Piedmont and Santa Teressa high which have 7+ great schools rating and median home prices above 1.5m. This shows that a lot of the new buyers in those neighborhoords will probably send kids to private schools or will move to better high schools in the future. 
• Kennedy (Fremont), Silver Creek, Willow Glen, Branham are all below the 10 mark

Irvington high school 2017-2021 College admissions

IHS Berkeley Admissions

• Irvington high is the second best high school in Fremont behind Mission San Jose
• Last 5 years, Irvington has sent a whopping 8%+ of its class to Berkeley every year on average. Acceptance rates from Irvington high to Berkeley range between 20-25% - meaning almost 1 out of every 4-5 applicants get accepted into the top UC
• Another 4% on average go to UCLA and 12% on 5 year average go to UCSD
• So total 25% of the class size has offers from UCB, UCLA and UCSD
• Irvington high school has relatively small class sizes of less than 600 as of 2021 - this makes it easier to get electives compared to other high schools with larger class sizes
• The 5 year % of class is using the class size of 600 to compute what percent of class gets admits from which university irrespective of how many are applying
• Irvington high has been beating arch rivals Mission San Jose in 2021 and 2020 - two consecutive years
• Irvington high sent similar number of kids to Berkeley as Evergreen, Branham and Leigh combined over the last 5 years
• Irvington got more admits to Berkeley as Harker + Bellarmine combined over the last 5 years
• In 2020, Irvington high got more admits to Berkeley than entire Los Altos school district (Mountain view high and Los Altos high combined)
• In 2018, Irvington high got similar admits to Berkeley(57) than entire Los Gatos Saratoga Union high school district (58) (Los Gatos high and Saratoga high combined)
• In 2020, Irvington high got more admits to Berkeley than entire Palo Alto unified school district (Palo Alto high and Henry Gunn high combined)

Recession proof Bay Area SFH school districts

Over the last 10 years, zero interest rates and reduced housing supply has led to indiscriminate rise in home prices. However as interest rates rise, some pockets of real estate will hold their prices while others wont. As has been noticeable in the 2008 crash, good school district SFHs retain value through recessions and price drops are minimal. The goal of this post is to illustrate why and also look at what good school district mean. Hang in there as 8+ greatschool rating doesnt mean anything and lot of shitty schools are rated 8 on greatschools based on equity scores. 

Why do good school districts go for premium ? 

• SFH
• The regular factors that go behind SFH are still at play
• Own and independent lot
• Ability to extend the home in future
• Inflation
• Raw material Inflation
• Homebuilding prices like lumber, copper, raw materials and labor increase with inflation
• Cost of building a brand new home goes up
• Tuition inflation
• Private school tuitions go up with inflation. For example : Challenger tuition fees in 2007-08 were 10k per year. In 2022, Challenger tuition is 23k per year. 
• At 2022 prices, cost of private school education for a kid is 250k and for 2 kids is 500k. 
• If you chose to go the public school route, then you pay the 500k into the mortgage which is an investment without compromising on education quality or outcome. More on the quality and outcome later. 
• As inflation rises, private school tuition will only increase from here and the SFHs with top public schools will be indexed to inflation
• This is why condos/townhomes in top school districts like Cupertino and Mission San Jose sell higher than SFHs in poor school districts
• Wage inflation
• This is applicable to all homes. Home prices rise with wage growth and inflation will lead to wage growth. 
• Supply constrained
• SFHs are lesser in supply. SFHs in good school districts are further lesser. 
• During downturns, this works to the advantage as the restricted supply still ensures there is enough demand
• During downturns, home values in these neighbourhoods generally go down last and are the first to come back up when the market improves
• This is what supply constraint looks like irrespective of school district
• During periods of inflation, prices of anything with limited supply goes up
  
  
  
  
• Upgrade demand from surrounding areas
• During sellers markets, lot of buyers get stuck in homes in poor school districts. Due to bidding wars, they dont get choice. A lot of them also have equity. For eg : somebody in Newark or Washington high school will always try to upgrade to Irvington or American high in Fremont. Somebody stuck in Leigh high/San Jose will try to upgrade to Cupertino/Mission when they realize that some kids in Leigh high also end up in community colleges. 
• Security
• Good school districts generally come with families which leads to area with better security
• Rental demand
• Homes in good school districts generally attract good strong renters reducing vacancy rate and increasing rental yield
• During rising rate environment, lot of people get priced out of the market. This leads to increased rising rental demand
• Stocks vs real estate
• During stock markets declines people panic sell and buy real estate because housing never goes to zero. Also if you are able to buy and hold the house then you are guaranteed to have that standard of living in the future, while with stocks you can be underwater for the next 10 years

What does good school district look like ?

Before answering that question, 7-8 rating on great school doesnt mean anything and doesnt mean a good school district. Great school ratings factor in equity scores by 40% which a lot of the buyers are not aware of. While whether this is the right methodology or not is a subject of another post, I like to use a different metric to evaluate good school district which is more consistent with home value retention during recessions and the actual value a buyer will derive out of the home. 

I use Berkeley admission rates and compute the 5 year, 10 year and 15 year average. 

Bay area has 13 schools which are in the top 100 US STEM schools. Out of these, Mission San Jose (Fremont), Irvington high(Fremont), Monta Vista(Cupertino) and Lynbrook(Cupertino) send 50 kids per year to Berkeley on Average. SFHs and condos in these schools tend to hold value in buyers markets because of the above reasons mentioned. 

Pleasanton and San Ramon also have amazing schools as linkedin above. But they have another factor which is distance from bay area which adversely affects them in recessions. The price drops are largest the further you move out of bay area. 

FIRE and Time Billionaries

Last week I came across a concept called time billionaire. In the context of FIRE, this has stuck in my mind. I have been a FIRE enthusiast over the last 5 years and this idea helped me put things into perspective. The goal of this article is to show you the tradeoff between time and money. 

The life expectancy of a normal healthy adult is around 80 years.

A billion seconds almost equals to 31 years. So on average every 20 year old has 2 billion seconds of time left. We work hard, spend our time to earn money, save our money to buy capital. The capital appreciates over time and gives us money. That is how we convert our time into money. 

Taking the returns of the US stock market over the last 100 years and assuming it doubles every 10 years, earning the capital early in life pays dividends in terms of that capital will give more money and time back to the owner to enjoy. 

Hence, 1 million USD earned at 30, will be 8 million by 60, if the owner doesn't need to depend on that capital for day to day expenses. As this post calls out, there are different brackets of numbers and where each individual lies in the bracket is a deeply personal question and the answer will vary based on lifestyle and choices. But the point is the faster you get there, the more you time you have from life. 

This point can be really driven home by this following question : 
If you got a chance to exchange your position with Warren Buffet today, would you do it ? You would be both the richest person on earth and also be 90+ and wont have long enough to live from hereon. 

For folks, for whom the answer is No, you already have the most valuable resource on earth which is time. Use it wisely and you can generate both time and money. 

Ellsberg Paradox and Option value of investing

 Ellsberg Paradox 

People prefer to take risks in situations where the odds are known, rather than a scenario where the odds are unknown - even when the latter scenario has the guarantee of a positive outcome (its just that the magnitude of the outcome is unknown). Its often used to evaluate how people have an aversion to ambiguity. 

Where do the traditional financial tools fall short ? 

In traditional investing, the most common financial tool for valuing a company is DCF model (discounted cash flow model). Under this methodology, investors attempt to accurately model out the discrete financial metrics of a company over a finite period of time, and discount the cash flow generated to determine the appropriate valuation for a company.

The issue is though that in real investing, businesses have embedded options which have unknown outcomes everywhere. DCF is terrible at valuing these businesses which have both : 1. uncertain payoff magnitude and 2. uncertain timing as to when it will occur. Examples of such options : 

• Amazon is able to extend its dominance on one ecommerce category(books) to multiple categories
• Amazon is able to extend its dominance in ecommerce to build the largest retail search engine in the world and draw advertising dollars
• Google is able to leverage its technology prowess in building scalable and reliable search infrastructure to build Google Cloud and democratize building distributed systems technology. Same for AWS and Azure
• Apple launching Wearables segment (Watch, airpods, etc) using its expertise in building iphones

For each of these successful options, there are multiple failed investments like Fire Phone, Google's communication apps, etc. However, in net all these embedded options have generated multiples of shareholder value which would not have been able to be correctly valued through DCF. 

This paper articulates this concept in detail : Get real, using real options in security analysis

This diagram illustrates how the valuation breakdown of such companies progresses

Some of the parameters to evaluate such businesses are

Management 

• Superior capital allocation 
• Access to cheap capital from markets or through high profit margin businesses
• Execution track record
• Ability attract top talent in the industry

Business

• Strong moat
• Economies of scale
• Economies of scope

Evolving markets

• New trends of user behavior and patterns
• Uncertainty

No wonder FAANGs check several of the above boxes and continue to generate superior returns for their shareholders. 

References

1. Hayden Capital Quarterly Letter Q3 2020

2. Get real, using real options in security analysis

Reasons to buy a home in Silicon Valley

Big Tech

1. Home prices in silicon valley track Nasdaq - basket of tech stocks 
2. Silicon valley is headquarters of top S&P500 companies - Apple, Google, Facebook, Tesla, Paypal
3. As tech companies become winner take all market leaders, housing seems to be a great diversification from company specific equity.
4. Google, Facebook, Apple pay hefty refreshers. Any engineer who has worked in these companies for 2-3 years can come up with a 200k downpayment in the bay area, which is needed to get a starter 1 million condo. If you are not working in FAANG(Facebook, Apple, Amazing, Netflix, Google), bay area real estate is your only way to play Faang equity refreshers. For context, Facebook E5 engineers make 120k and Google E5 engineers make 100k refreshers every year. An Engineering Manager in these companies in bay area easily makes north of 600k which is higher than Vice Presidents/Directors in many fortune 500 companies in New York, Toronto, London. All these folks buy a home where they live in, ie in the bay area. 
5. Low interest rates(<=3%) in the last 10 years has propelled asset prices

Startup Ecosystem

1. Silicon valley is the start up capital of the world. Startup IPOs continue to mint new millionaires in the area who buy homes. For eg : Uber, Lyft IPOs of 2019 pumped up bay area housing prices. Bay area startup IPOs are the greatest millionaire generating machine today. 
2. Top venture capital funds are all located in Sand Hill Road, Palo Alto. Easier to raise funding in the bay area. Andresson Horowitz, Benchmark, Sequoia Capital are all based our of Bay Area. 
3. More IPOs produce more founders, more capital, that keeps this innovation engine going. 
4. Startup talent : given all the startups and big tech, bay area has an ecosystem of startup talent and knowhow. 
5. Biotech hub : South San Francisco is the home of biotech. Biotech is going to be the next big disruption. 

China 

Chinese all cash buyers propel prices in the bay area.

1. Limit on owning home in China for more than 70 years
2. Rich Chinese buyers buy bay area property  
3. Chinese kids who study in US often come to bay area and buy houses with all cash down payments from payments
4. Chinese people have generated enormous wealth in the last 2 decades with companies like Alibaba, Tencent and Baidu having big IPOs. Bay area real estate is a great diversification play. 

Covid

This is a surprise one. 

1. San Francisco is one of the few top cities worldwide which has truly flattened the Covid curve. Also San Francisco is home to UCSF hospital and Chan Zuckerberg hospital. UCSF ranks among the top 10 medical units in USA. 
2. Covid will accelerate the adoption of tech worldwide. Tech companies will win and their stock prices already reflect that. Increased tech stock prices will continue to support bay area home prices
3. Federal reserve money printer will continue to print dollars. These dollars will have a trickle down to real assets and asset price inflation will continue as interest rates continue to be at historic lows. Due to Covid, there will be unprecedented economic job losses and  Fed will continue to support low interest rates thus creating another mega asset price bubble.  
4. Chinese economy will come out pretty much unaffected. Any softness in bay area home prices, will be great opportunity for all cash Chinese buyers to gobble up. 
5. If you are too worried about remote work affecting home prices, look at cities like Wellington, Vancouver, Melbourne who never had top tech jobs to support sky high real estate prices. 

Cities

1. Bay area has two major cities : San Francisco and San Jose 
2. Three International Airports : San Francisco, San Jose, Oakland
3. Cities have major network effects. Think about New York City, Mumbai, London, Vancouver, Toronto. Bay area home prices are cheap compared to these cities given high per capita income. Bay area has the lowest barrier to entry compared to these cities because there are enough jobs available who can pay you to support the home prices.
4. Public transport connectivity through Bart and Caltrain between SF and SJ

Weather and Natural Beauty

1. Last but not the least, amazing weather. You get what you pay for. You are not holed by half the year due to snow or rain here. 
2. You have Yosemite, Tahoe, Sequoia, Lassen Volcanic national parks within 3-4 hours driving distance
3. You have the beautiful beaches and the pacific coastline - the scenic CA-1 drive filled with amazing natural hikes

Education 

1. Two top universities : Stanford and Berkeley are located in the bay area. They attract top talent from all over the world. Top professors want to teach in these universities because of the bay area living
2. University of California : The UC system has top colleges like UC San Diego, UC Irvine, UC Santa Barbara, UC Los Angeles. Cash rich foreign parents often buy homes to establish residency for their teens so that they can get admitted to UC system as local on lower fees. 
3. Top private schools where kids of tech professionals go to : Stratford, Harker
4. High property prices support high public school funding. Top public schools : Palo Alto High, Mission San Jose. 
5. Good supporting universities : University of San Francisco(Top 10 hospital in the country), UCSF, SJSU

If you have read till here, you can also break into Bay Area big tech : read my Engineering Management blog here, articles free of management jargon, real insights that will help you advance your career.