Chapter 7

On Words from the Wise

A fool repeats history. A greater fool ignores the advice of those who have lived through history. In this chapter, we will examine some of the wisest investing quotes, ideas, and misunderstandings that have stood the test of time. Destroy the idea that people make it big by luck; it is a fruitless deception that is completely counterproductive to the psyche. Investing wisdom combined with hard work is what will lead to success over the long haul.

Let us begin with advice from our good friend Benjamin Franklin: “An investment in knowledge pays the best interest.”

I start with this because I once had a friend approach me concerning cryptocurrency investing. I had been talking to him about blockchain technology for about sixty seconds. He stopped me and said, “Carter, I’ll just give you my money and you can invest it for me. I trust you.”

In that moment, I looked him in the eyes and laughed.

It was an intense fit of laughter followed by a long silence. He looked confused and said, “I don’t understand, why are you laughing?” I told him the truth. “Never trust someone else with your money, and on top of that, never invest in something you can’t explain.”

When we take Benjamin Franklin’s advice and invest into our own knowledge of blockchain, we are rewarded with being able to understand what truly valuable projects look like.

The knowledge that is gathered by deeply investigating and researching the various white papers, programmers, GitHub repositories, researchers, network statistics, news, and development road maps is what amounts to foundational knowledge that gives us real direction in our investment decision-making.

Too many people expect information that is truly valuable to be handed to them on a platter. If you want crypto investing success and if you want the type of knowledge that “pays the best interest,” you must go out there and dig for it. You have to grind through the piles of mud to find the pot of gold. There are no 100 percent promises in crypto. No one ever promised you universal success with every single one of your investments.

In summary of Benjamin Franklin’s quote, when it comes to investing, nothing will pay off more than educating yourself. Do the necessary research and analysis before making any investment decisions. Strive to have unemotional and objective investment conviction. Only then are you truly leveraging the power of the information itself.

The Oracle of Omaha

Warren Buffett is a name whispered in awe by both amateur and professional investors. One does not talk about investment advice without recognizing Buffett as a prime vault of wisdom; precious advice from this vault of knowledge has been given out to us all for free. Ironically, it seems Buffett is not the biggest fan of the crypto space! Nevertheless, we will extract the wisdom he has had from his direct experiences and apply his wisdom to our own situations and investments.

Investment risk is defined as the probability or likelihood of the occurrence of losses relative to the expected return on any particular investment. Stated simply, it is a measure of the level of uncertainty of achieving the return as per the expectations of the investor. Investors in the upper echelon believe lack of knowledge increases your total risk. As Warren Buffett pointedly puts it, “Risk comes from not knowing what you are doing.” While this may be a slight exaggeration as there is always “risk” in any market, his thoughts seem to line up with Benjamin Franklin’s. Reduce your level of uncertainty by exploring the factors that would make your investment decision uncertain.

This might sound like a simple idea, but so many people jump into borderline gambling because of a lack of awareness surrounding investment risk. These optimistic and often new investors will convince themselves opening leveraged longs or shorts on a cryptocurrency is a brilliant idea. Worse, some commit all their capital to just cryptocurrency without any diversification into other asset classes such as precious metals, stock, bonds, real estate, etc. This can result in a rather costly and disheartening first encounter with crypto.

Frustrating and disastrous failures can be avoided by tempering emotional investing with solid fundamental analysis of why you are about to make your move on an investment. Following a method for investing using a quantitative model, which generates a price target, parallel to your qualitative investigation helps reduce overall investment risk.

To quote Peter Lynch, “Know what you own, and know why you own it.” Knowing why you own something cannot be repeated enough. Do your homework before deciding. And once you’ve decided, make sure to reevaluate your portfolio on a timely basis using new information—if you don’t, you are at risk of anchoring bias. A wise holding today may not be a wise holding in the future.

Here is a shortcut to knowing if what you are about to purchase/invest in is a good idea, according to Warren Buffett: “Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.” Reread that—seriously. This is the apex of what fundamental investing circulates around. Write it down. Memorize it. Let it be your creed. This is the type of mindset you must adopt to set yourself above the pack. Pick the winners that will be around in the next five to ten years, not the ones that will skyrocket for only a day or two, and then fade into oblivion.

Parabolic Stupidity

Parabolic growth. Soaring prices. Numbers in the green. Consecutive days of massive growth. Endorphins. Elation. Greed.

“Every once in a while, the market does something so stupid it takes your breath away.”

—Jim Cramer

Parabolic growth is an uptrend in price in which the angle of ascent increases as time continues onward in the shape of a parabolic function. Parabolic growth is fueled by retail money and FOMO. Parabolic growth cannot be maintained because of the laws of economics. The opportunity cost of alternative purchasable items will eventually come into play, as well as the fact that our planet has a finite amount of resources.

Suri Duddella, an analyst who specializes in the impact of sentiment swings on price, found that post-parabolic growth typically sees a 62–80 percent reversal in price on average. Gold prices from 2000 to 2011 are an excellent example of this: prices increased from a mere $200 all the way to $1,800. Naturally, 2013 saw a drastic downswing back to $1,100. The NASDAQ’s parabolic growth from 1995 to 2000 saw an 80 percent retracement in price! Talk about volatility.

“But a pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street—a community in which quality control is not prized—will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.”

—Warren Buffet

Be wary of parabolic growth. If you see an asset double in value in under a month, you should look for an exit point. Don’t get greedy. If you are in the green, look to exit once a reversal is in sight.

Figure 8: Gold Bubble

Figure 9: Bitcoin Bubble

This chart was the price of Bitcoin from 2014 to 2018. During a five-month time frame, Bitcoin saw a nearly 250 percent increase in price. Naturally, this wasn’t sustainable. Any investor who saw a 2x in money ($100 becomes $200) should have been looking to exit. These types of gains are unheard of. They don’t last. A vapor in the morning. Collect it while you can, because it will dry up quickly in the heat of the market.

Many people refused to sell during and after the drastic price increase. Fortunately, most of these investors will be fine in the long run because cryptocurrency continues to grow as an asset class. Despite this, these investors could have grown their wealth if they had chosen to be less greedy. Instead, they did not increase their net worth because they were stuck waiting for the price to return or exceed where it once was before.

This is unfortunate, but altogether preventable, if a principled investment plan were in place. Beware of bubbles. If you are on the profiting end, financial bubbles are some of the most amazing opportunities. You are better off incrementally locking in gains than losing all of your potential gains to a lack of planning and greed by refusing to sell even a portion of your cryptocurrency.

Figure 10: Bitcoin Bubble Boom & Bust

To Spot a Bubble

As Warren Buffett puts it: “It’s only when the tide goes out that you learn who has been swimming naked.” To put it bluntly, only after a bubble corrects can we see who had investing principles and who did not. Part of what acting on investing principles means is having a target sell price, a reason for the sell price, and the courage to carry through in the face of behavioral factors fighting against that instinct—to be resolved in the face of greed or fear.

A common occurrence in asset classes that have seen such absurd volatility (such as cryptocurrency) is to hear people say, “There will never be a bubble again.” This is typically touted by new investors who got burned by a bubble and understand at some point in time they had a huge opportunity to grow their wealth. Post-bubble, as time progresses and the market stabilizes, people fall into the cognitive trap of believing two ideas. First, people assume if a bubble occurs again, they will act rationally and thus don’t need a plan. Second, they believe other investors will act rationally in the face of a bubble occurring again.

Both ideas are false.

“What we learn from history is that people don’t learn from history.”

—Warren Buffet

But what precisely characterizes a financial bubble? What types of buzzwords can we look for in our crowd mentality that signal we should step to the side before following the cattle off the cliff? While any variable listed below in isolation is no guarantee of a bubble, a combination of a couple of these should set off alarm bells in your investment journal and investigative work.,

•Extreme media attention on an asset that traditionally does not receive attention

•Investors rationalizing lending, borrowing, and purchasing based on the expectation of the price increasing (as opposed to the fundamentals that make the asset intrinsically valuable)

•Factual evidence of a drastic increase in investors purchasing on margin

•Rationalizing price by weak arguments, such as “this time it’s different” or “prices only go up.”

•Hostility toward individuals who are skeptical about the drastic price increase

•Distinct lack of quantitative and qualitative model discussion

•Investors actively trying to convince others to purchase the assets

•Volatile change in ratios that have had historical significance (such as 2–3x price increases past all-time high price)

You have an opportunity to be outside of the crowd: an anomaly in the face of greed, ignorance, and downright stupidity. Master this list, and the world will open up to you. Even if you can’t spot bubbles, and the model and variables presented here are flawed, you still give yourself an advantage.

“In the land of the blind, the one-eyed man is King.”

—Desiderius Erasmus

Later chapters will give you additional skills to navigate and have a plan inside and outside of bubbles. For now, rest easy in the knowledge that the first step to profiting or avoiding a bubble is to first be aware of their existence.

Success

“If you look really closely, most overnight successes took a long time.”

—Steve Jobs

This is true of investors and investments. Much of the advice that exists in investing orbits around the idea of taking risks while also having patience. Because of inexperience, new investors feel the impulse to make decisions. They want to play the bubble to its fullest.

They dive in, touting the fact that the only way to be successful is to take risks.

The bottom of the proverbial pool hurts—and it’s almost always a surprise when an investor bumps into it. Impulse decisions are not sustainable.

I would make an addendum to this simple truth. The best investments you will ever make are founded in taking a long-term risk on a long-term growth proposition. This is because just as the best companies and blockchain protocols are not built overnight, neither is the case for your investments. Treat risk as the greatest mentor, one that will punish you for being brazen and reward you for wisdom.

“There is a difference between the irresistible impulse, and the impulse not resisted. And that is why the best thieves don’t get caught.”

—Efrat Cybulkiewicz

Maybe you will get lucky. Maybe you will invest in a “moonshot” coin. Maybe. But don’t count on it. The cryptocurrency casino is open twenty-four seven, 365 days a year globally. Know your investing fundamentals and understand the wisdom of those who have gone before you or suffer the consequences.

I’ve ranted and raved about fundamentals and taking responsibility. This is done by having investing principles. But what exactly are principles in crypto investing and how do we apply them to our investing strategies?

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