Chapter 5

On Loss and How It Happens

“Failure is so important. We speak about success all the time. It is the ability to resist failure or use failure that often leads to greater success.”

—J.K. Rowling

We cannot deny the fact that you can lose money. The world is built upon the success of many, and on the surface of financial success, we almost never see the statistics for failure. Traditionally, the majority of writers appear to have an unspoken social contract to only talk about what creates success. I am going to buck that right off the bat by having a whole chapter devoted to losing and failing with investing.

The stories of failure are countless, and most go untold.

Rob P. Gekwiak is a rare counterexample, in his single video recounting his story of failure. Rob speaks about it as if he is talking about the loss of a loved one—a trace of sadness and tension clearly resides on his face and in his tone as he begins his story: “I didn’t really want to put this out, but I know people support me no matter what.” He takes a deep breath in, and then continues, “I put all of my money into crypto and then some . . . I was just over everything. I thought I could see this trend happening—so I started putting all of my money into crypto.” He made the veritable first mistake so many do: overleveraging what they own on the roll of a die. This quiet, unfounded belief that they can beat the market throws them into treacherous water.

What is heartbreaking about Rob is thousands of people are just like him, but few are brave enough to embrace it and issue a warning to others. “I just said f*ck it. I had this really YOLO mentality. I thought to myself, ‘If the gain is a hundred times then it’s worth it for losing ten times. Well guess what happened? The loss was ten times. Money I didn’t have that I owed on bills I put into crypto.” Hindsight is twenty-twenty for winners and losers. But some losses are more likely than others, and people such as Rob are aware of this after the fact. “I made a ridiculous decision, and it destroyed me.”

Others have slightly different stories, ones of rags to riches, and then back to rags again. “I refused to sell . . . such a stupid move man . . . such a stupid move.” Meet Simon Golestan, founder of Advertisely. Simon’s story started in 2017 with investing in Bitcoin when it was worth $7,000 after talking to his friend Nick at an In-N-Out Burger joint. After reinvesting his money into Vechain (another cryptocurrency), his crypto net worth grew to $337,000. During the crash of 2018, instead of exiting while he was profitable, Simon continued to hold on as Vechain lost nearly 97 percent of its value. “Why sell? I believed it would come back up. But it never did. It literally never went back up. I said to myself, ‘I will let it go to zero instead, I refuse to sell.’” In the end, Simon sold all of his cryptocurrency for $20,000. He walked away better than most because of how early he got it in, but clearly he learned some harsh lessons.

Unfortunately, Simon took his YouTube investment confessional down in early 2020—whether it was shame, embarrassment, or simply looking for a fresh start, he was not open to commenting.

The RSM Titanic and Responsibility

When the RSM Titanic was launched in 1911, the world believed it had found an unstoppable beast. It was the second of three Olympic-class ocean liners, seemingly impeccable in design. “I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern ship building has gone beyond that.” Captain Smith was the commander of the Titanic, an experienced veteran with over forty years of sailing experience. The Titanic is fraught with many valuable lessons, but the most important elements were never of the ship itself. The factor that was not accounted for by Captain Smith was that of human error and confidence.

“I thought her unsinkable and I based my opinion on the best expert advice.”

—Phillip Franklin, White Star Line vice president

You would think someone like Philip Franklin to be the expert; the person who is a straight shooter and expert in the Titanic industry. But he wasn’t. Any expert that is trying to sell you on the idea that something has a guarantee of success is a wolf. There is no sheep’s clothing involved. They are the easiest to spot. Visible at the frontline shouting about their success, even as they try to sell you a spot on the lifeboat they are exiting onto. A great deal of failure is bound up in a deadly human bias. Just because someone knows more than you on an investment does not mean their knowledge or thesis is correct. Traditionally, the unassuming builders, designers, and veteran users are where the truth resides.

“Let the Truth be known, no ship is unsinkable. The bigger the ship, the easier it is to sink her. I learned long ago that if you design how a ship’ll sink, you can keep her afloat. I proposed all the watertight compartments and the double hull to slow these ships from sinking. In that way, you get everyone off. There’s time for help to arrive . . .”

—Thomas Andrews, managing director of Harland and Wolff shipyards

Clearly a disconnect existed between the people who make the boats and the people who sell the boats. This is the first lesson of loss: you have the responsibility to decide who you listen to and trust. Peter Lynch, a legendary Wall Street investor who produced 29.2 percent annualized return for thirteen years, put it pointedly: “There seems to be an unwritten rule on Wall Street. If you don’t understand it, then put your life savings into it.” Lack of education is a lurking killer. Until you understand what you are investing in as well as the likelihood that investment is to fail, then you will be someone who fails to accept that your investment is sinking until it is all the way under the water.

As Eva Hart, a titanic survivor, put it, “And it wasn’t until we were in the lifeboat and rowing away, it wasn’t until then I realized that ship’s going to sink. It hits me there.” Eva Hart is our example of a hopeless speculator, someone who couldn’t accept a loss until it was too late. It’s okay to take a loss. I would never recommend anyone to invest unless they have the ability to accept a loss. Investors that are not capable of this are usually one of three things: prideful, ill prepared, or greedy.

You will notice thus far that many of the factors of loss are controllable and yet deeply interwoven into human nature. I myself was in a similar situation. When Ethereum (the cryptocurrency I was invested in) skyrocketed from $400 to $1400 in 2018, I was stuffed with pride. I was brimming with confidence that I had made an investment of a lifetime. I didn’t have a strategy or an exit plan. I was the trifecta of perfect sins, emboldened by the adrenaline of seeing so much success so quickly. I was in every way no different than Simon Golestan, caught up in the excitement of the moment.

“When arranging a tour around the United States I had decided to cross on the Titanic. It was rather a novelty to be on the largest ship yet launched. It was no exaggeration to say that it was quite easy to lose one’s way on such a ship.”

—Lawrence Beesley, Titanic survivor

I was lost on that proverbial ship and I learned a lesson I would never forget. If you fail to plan your buying and selling strategy you face the possibility of losing money. Anyone can tell you this. But what is the deeper lesson? What do you learn when you get lost on the ship and finally find your way out? For me it was this: If you fail to actively plan against your lowest human instincts, then you face the guarantee of deep investment regret. Investment wisdom isn’t cheap and it often has a price tag known as “a big mistake” attached to it. The sooner you take responsibility for the levity of your own decisions, the sooner you will be on a path that veers away from failure.

“The most important quality for an investor is temperament, not intellect.”

—Warren Buffett

The Buffalo Cycle

Success with investing is an iceberg—beneath it lies the skeletons of those who fell to the wayside from fear, lack of patience, mistiming, emotional investing, irresponsible loans, and (perhaps the most dangerous) ignorance. Are these preventable? What do we control? Fear. Uncertainty. Doubt. Despair? The big drop. The free fall. Portfolio in the red. Fifty straight days of percentage losses. That stomach-emptying feeling. The sadness. The hopelessness. When you invest in crypto without principles, these moments will throw you around. Because cryptocurrency is more volatile than any traditional investment, herd investors are regularly eaten up by the wolves of volatility. With or without a plan, crypto investing is not for the faint of heart. If your conviction cannot look at some level of “danger” in the eye and see opportunity, then you may consider investing in a US T-bill, which offers a “wild” 2 percent return on your fifty-two-week investment.

Hey, no judgement—some people enjoy watching paint dry.

The key to avoiding failure consistently is to have firm principles. It lies entirely within your hands how much time you put into researching which cryptocurrencies and investments you are putting your money into. Every investor has agency, and you must have principles to guide your agency. Some investors might not feel that they have the choice every moment, but you always have control over when you buy and sell. You control how much belief you have in the future of any investment. This book has an entire chapter devoted to principles—suffice it to say they are a patchwork solution to human behavior.

The beauty of having investment principles is you give yourself the chance to be ahead of the herd. You get to gracefully exit when things get scary because the writing will be on the wall. Humans are pack animals that repeatedly fall prey to the cycles of tribalistic mindsets. “Safety in numbers” until those numbers lead you astray. When you run with the buffalo, you lose track of where the cliff is. The alternative? Track the pack, follow it, but never get sucked into the madness of euphoria.

Image 9: Investment Hype Cycle

The online places we go to for opinion, advice, and comfort during drops or upward climbs in price can turn us into herd animals. YouTube, Facebook, Twitter, Reddit, Instagram, and texting can all lead to amplified emotions. This fogs our ability to understand the fundamentals we are investing in, often causing a hasty, fear-filled decision to buy and sell. Suddenly, you get this “sense” everyone is investing in something else and you need to do it right now: the Buffalo Cycle. It is vicious and it is everywhere. Investors without a plan and without principles are pulled along the emotional roller-coaster. These investors are brought to the edge of euphoria and thrown off into the valley of despondency. Most investors understand these cycles, but to be able to act on any of these trends is difficult, the key is to avoid denial. Stay realistic and stay humble.

At the same time, there is a time and place to follow the crowd. You do so when it aligns with your preplanned strategy. Then and only then are you allowed to adjust, assuming everything plays out favorably. The most difficult investment decision you will have to make is running against the herd. Conviction is underrated because it’s prone to turn into a loss if the decision becomes emotional. This is why strategic conviction must be the goal.

What does strategic conviction look like? “My target sell price is $220, period. This sell price will minimize my loss by 20 percent. I will sell no matter what, I will not try to time the dip. I will not wait for it to drop to $200. This is my strategy and I will stick to it. My other target sell price is $301.30, which will yield a 15 percent upside. I will not sell until the crypto asset reaches one of the sell price targets, period.” This internal dialogue is what strategic conviction sounds like. This is what will save you from the pack.

There may be a time where you miss a target sell point and you are thrown into a flurry of emotions. Whatever you do, hindsight will reveal what was right and what was wrong. Return to the qualitative and quantitative drawing board (which we have yet to fully cover) and review the facts. Avoid the herd’s influence. Make your decision and stick with it.

Position Gratification

Your final destination for your wealth is what determines what is truly a loss. Is it the overall value of your position in US dollars? Is it the amount of cryptocurrency you own, separate from fiat? Is it about maintaining a certain percentage of your overall portfolio in crypto?

Traditionally, loss is measured in comparison to a benchmark. If I gain 2 percent on an investment into cryptocurrency, but the S&P 500 gains 7 percent in that same time frame, we consider it a relative loss of 5 percent and then some because of the amount of risk. Retail investors, or the everyday pay people that don’t have access to large amounts of capital, typically struggle with this concept, which is why investing in index funds is considered the safest way to earn money.

Let me reiterate that truth here: index funds are the tried and true way to invest. Everyone should have some percent of their portfolio consisting of index funds. When you invest in an index fund such as the S&P 500, you are investing in a representation of the US economy. Portfolio composition is talked about in the chapter on principles, and I firmly suggest that a large percentage of your net worth be invested in index funds. A remaining part of your portfolio, which could range anywhere from 0.5–10 percent depending on how much risk you are willing to bear, can be placed in high-risk assets such as cryptocurrency for the opportunity of a higher return.

No discussion on when you lose in investing would be fair or complete without touching on the time value of money and opportunity cost. We will use the common acronym TVM as a replacement for the time value of money. The TVM is the concept that money available at the present time is worth more than the identical sum of money in the future because of its potential earning capacity. A dollar invested today is worth more than a dollar tomorrow. Essentially, investing is great, and we should do it now as opposed to later, because money decreases in value when it’s not growing. Not investing money today is technically a “loss” if viewed under this lens.

How about opportunity cost? Hopefully, you have heard of it. Opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen. As it relates to investing, it is the money lost if you would have invested in a different cryptocurrency or asset class. An example would be if your crypto investment went up 10 percent when the majority of other crypto investments went up 30 percent during your investment time frame. You are “losing” money even if on paper you gained. Veteran investors are hyperaware of how their portfolios and investments size up to alternatives and benchmarks.

“I’m always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have.”

—Paul Tudor Jones

We must be aware of getting “stuck” in an investment that could have given us better return elsewhere. If your money is not earning money at a solid rate, or if it is not earning at a comparable rate to other common alternatives, then you are “losing” money or failing as an investor depending on how pessimistic you are about yourself. Have an exit strategy for when price drops because of a change in the underlying value of a crypto asset. It’s okay to take a loss.

“Learn to take losses. The most important thing in making money is not letting your losses get out of hand.”

—Marty Schwartz

You lose money when you sell at a loss. The inverse situation is also true: you can only gain money when you sell. When you actually click the sell button, not before. Lock in your victories or losses, or you will end up like Simon Golestan, who let his position slowly slip away over time.

Having your Bitcoin be “worth” $2000 more by the market is an increase in your net position only within cryptocurrency terms. Unless you transition back, the “gain” is meaningless. Until the moment you transition back to dollars (assuming this is how you measure your wealth), you have not gained wealth. This is not so with a house, car, or some other asset that has perceived intrinsic value by the majority of society—those assets hold their increases in value much better than cryptocurrency. If cryptocurrency were to gain worldwide adoption and reach a critical turning point, then it too would hold onto its value with less volatility overall.

But alas, volatility currently still reigns supreme.

Black Swans

The 2008 financial crisis, the Great Depression, and the COVID-19 temporary stock market dip—these are examples of utterly unexpected financial events that are unpredictable. No one was expecting COVID-19 except a few pandemic professionals. A select set of investors may have been ahead of the curve. But even they were not anticipating the Russia-OPEC oil price war to happen simultaneously. These are all examples of Black Swans: unpredictable events beyond what is normally expected of a situation, typically characterized as “obvious” in hindsight despite being a low-probability event.

A true Black Swan usually results in the price of an impacted asset to be permanently depressed or stuck in a period of negative or low growth for a significant portion of time. Black Swans’ precise timing cannot be predicted. If a Black Swan does occur, your reevaluation of what to do with your position (buy, sell, or hold) could be the difference between losing 20 percent of your money versus 80 percent.

The following is a list of the most likely Black Swan events that would negatively impact crypto:

•Extreme currency devaluation in a major country causing a major market financial crash and subsequently causing the majority of asset classes (including crypto) to crash

•Significant war breaks out on a global scale causing regulations to ban on-ramp fiat exchanges to cryptocurrency for political and economic reasons

•Multiple of the big five banks simultaneously filing for bankruptcy

•Extreme fees for on-ramp fiat movement are announced

•Multiple countries defaulting on debt without major countries supporting a bail out

•A top five largest blockchain protocol is hacked and everyone loses their crypto wealth hosted on that ledger

•A 51 percent attack is consistently carried out against the top five market cap cryptocurrencies (rendering decentralization and security to be broken)

•Market manipulation is discovered among multiple exchanges

These are just a few of the infinite iterations that could possibly cause a domino effect that creates a nearly impossible to predict “Black Swan” event. Many of these have occurred to a smaller degree, but never at the scale described.

I am trying to impart some fear in you right now. If none of those scenarios created even an ounce of fear, you may need to re-examine your basis for risk-reward (you might be a gambler). On a side note, you should also have a plan in case of a countrywide economic crash. It pays in dividends to be prepared for what most people are not even considering as a possibility (those who had extra capital prepared during the 2008 financial crisis were able to net some amazing returns because they had a plan).

Black Swans have such a distinct impact on cryptocurrency because when major global turbulence hits financial markets, investors move their money from speculative assets into safer assets that they trust, such as index funds or bonds. While the thesis in this book is that Bitcoin and other cryptocurrencies will one day be globally trusted (potentially as a hedge against sovereign currencies), they do not yet operate in this fashion. As such, you must be informed that things can go south. The thesis could be wrong. That is the risk you choose to embrace when investing in speculative assets—they are speculative for a reason.

Mastering and successfully navigating the investment world is not just about quantitative models and qualitative investigation. It is also about having profound respect for the ramifications of human behavior.

The truth is that risk is always involved. Principles allow us to manage that risk. Choose to acknowledge risk that could result in loss. Never ignore the possibility of failure. Have strategic conviction and understand the danger of following the crowd. If you embrace these truths, then you don’t have to go down with the proverbial Titanic.

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