Note to readers: The following pertains to investing in general… Not just cryptocurrency. I promise. So don’t bail on me if you are not in bitcoin.
I got this email a few days ago, from Cissie. She says:
“Ugh! I bought bitcoin very near the top this time last year. My fiancé and family all thought I was being foolish. I was convinced I would totally prove them wrong when my genius investment made me a millionaire. My dad keeps quoting an article that says Warren Buffett and Jamie Dimon have the last laugh on cryptocurrency and is telling me to salvage what I can by selling. I am beginning to think he is right. I am not sure what to do. Any thoughts would be appreciated.”
I know she is not alone in that. Lots of people bought near the top last year… including me!
Because I don’t believe in market timing, and even though I knew we were in a bubble and was saying so at the time, I bought a big chunk of GBTC in my IRA up around $17,000. So I can certainly empathize with the “Ugh!”
The first thing I think is critically important for you to understand is no one knows what is going to happen in this market… or any market.
No one knows. I don’t know. Cissie’s dad doesn’t know. Warren Buffett doesn’t know. Jamie Diamond doesn’t know. No one knows. They never know.
What we all have is an opinion.
Each of those opinions falls somewhere along a continuum of knowledge… from zero knowledge to world’s leading expert.
And each opinion also falls along a second axis, which is the extent to which it is colored by our own bias or agenda.
If you imagine that as four quadrants, every opinion falls somewhere within one of these four:
99% of the opinions you hear are coming from someone in those three compromised boxes.
It is very, very, very difficult to find anyone in that fourth box. We all have agendas, incentives and even emotional biases that we may not even know affect our opinions. And that may not be readily apparent.
The way I try to approach this, for myself, is to invest (and learn) in such a way that acknowledges:
- No one knows what will happen in the future
Remember, if you flip a coin five times, in a room of 1000 people, 31 would have correctly called all five coin flips. But that doesn’t mean they are coin flipping genius that you should pay for their coin flip picks.
- The shorter the time horizon the more the result approximates a 50/50 coin flip
Meaning each price movement or flip will have no impact on the next flip and is therefore meaningless noise. But you aren’t actually playing this game with a fair coin.
You are actually playing with a weighted coin that favors upward moves over downward, which approaches the weighting the longer you play the game.
- The one person I can be most certain about having no conflict of interest and no agenda is me
Although, to be sure, we are all plagued by our emotional biases that very often are as bad as the advice a hugely conflicted advisor would give.
One thing I can promise you, without having or needing knowledge of what will happen to the price of bitcoin in the future…
Now is NOT the time to sell your bitcoin. That was a year ago!
Investing is a probability game. What we know, without a shadow of a doubt is, that the downside is less and the upside greater at $3500 than it was when you bought at $20,000.
And yet, our lizard brains scream at us to do the opposite of what we should be doing, which is to buy when something is going up and sell when it is going down.
The probabilities tell you this is backward and the wrong bet. Every time.
You have to lose money to make money…
This is so counterintuitive because our brains are terrible at understanding risk and return.
Perhaps a better version of my statement is:
You will almost certainly have to lose money in the short run, to make money in the long run.
And the corollary is, the more you want to make in the long run, the more you need to be prepared to risk losing in the short run.
Why is this true?
This should be obvious but needs constant re-stating…
No investment makes money all the time
If that were true, there would be no risk. And since profit is the reward for risk, if there was no risk, there would be no profit. Those are called money market accounts.
Investments go up and down. The expected return is the average of those ups and downs over time.
And again, because those ups and downs occur over a period of years, in what approximates a series of weighted coin flips, the longer you are in an investment, mathematically, the higher the probability it will approximate that expected return.
But, in the meantime, because this isn’t Lake Wobegon, where all the children are above average, in order to get the upside, you have to also participate in the downside.
So, first, you have to know that going in. And if you can’t afford to stay in an investment long enough to get the upside, then it is the wrong investment.
Unfortunately, what tends to happen, because the smaller, modern part of our brain, which is the pre-frontal cortex, made the logical decision to buy this, with the best of intentions of holding forever…
Another part of our brain… the pre-historic, lizard brain that is charged with our survival takes over because it gets scared when things go down.
The lizard brain convinces us to sell. And then we wonder why we can’t make money as investors???
It’s because, if you fall into that trap, you are only participating in those downsides and never the upsides.
The trick is to find a way for your lizard brain to stick it out, so you can sell when it is going up, not the other way around.
One word there: systems, systems, systems….
That is the game and that is the struggle.
Markets go up and markets go down. The more return we want, the more up and down we have to tolerate and the longer we have to hold, without selling.
That said, there is no guarantee that even if we hold, that we will make the expected return.
That would be too easy, right?
Just like in blackjack or in poker, the right decisions, arrived at by diligently following the right rules or process can, at times, yield a bad result.
Take a real situation that happened with my uncle…
A major hurricane was forecast to make a direct hit on Houston. You decide to evacuate. You sit through 12 hours of traffic to get somewhere that normally takes three hours. At the last minute, the hurricane veers east and misses you entirely.
Good decision. Bad outcome.
A few years later, another category five storm is forecast to hit. You think to yourself, no way I am evacuating this time. I have my 85 year old mother living with me. She is too hard to travel with. Last time it was fine. Again, hurricane veers off and misses the city.
Bad decision, good outcome.
Next time, same scenario. You stay. Only this time, it’s Hurricane Harvey. Direct hit on Houston. Your home is destroyed. There is no power for weeks. No nursing homes to put your Mother in.
Bad decision, bad outcome. The people who left? Good decision, good outcome.
Probability games are hard for just this reason.
One outcome has nothing to do with the next… and it is a numbers game.
But, if you play long enough, most of the time good process lead to good outcome and bad process to bad outcomes.
In the meantime, the results can be really deceptive if you don’t have the big picture view.
And it is in that moment of weakness that your lizard brain, or someone who doesn’t know what they are talking about, or has an agenda… convinces you to abandon the process and sell at the exact wrong time.
For the record, I still own all the cryptocurrency I have bought, then and since, and will not sell it unless and until it goes up far enough to trigger my exit rules in the SANE CRYPTO framework, which are a long, long way up from here.
My options are always, only, ever, hold forever or sell at the price pre-determined by my systems, which is always, only and ever, at a profit. 💵
As always, I hope you found that helpful.
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