Ask the average person a year ago what the price of Bitcoin was and they would look at you like you were from outer space. Now with the $11k price being hit, everyone knows about it. People are saying, “BUY! BUY! BUY!” If someone tells you that, ignore them. The ship for maximum SHORT TERM profit has sailed. Read closely: SHORT TERM. If you made it this far you’re thinking why listen to some college kid? You would have a point.
I’m reading Warren Buffet’s favorite book: “The Intelligent Investor” by Benjamin Graham. It outlines the framework for controlling your behavior when investing. While I’m not finished with the book yet, it has so many gems of knowledge. The first being, whatever is the typical thought process is probably the opposite of what you should do. Since no one can truly predict the behavior of the market, you must control your own behavior. YOU. You must control your own behavior. Aside from the application this has outside of investing, this is counter to typical investing thought. A typical thought is predicting the market and letting that affect your behavior. Graham corrects this by reversing it. You must predict your behavior and let that affect how you approach the market.
At this point I would like to point out the edition I’m reading was written in the 1970’s and I’m only at chapter 8 but, all knowledge is applicable 40 years later. The next gem was defining investing and speculation. Investment should be seeded in THOROUGH research, by this research your safety of principal and return is guaranteed. Speculation is often used interchangeably with investing. Speculation is based in market sentiment. Translation, when your neighbor who lives in rural NC, says, “I just read about bitcoin on the news and it’s going crazy! Time to invest!” That’s speculation. They see the rising price and the mood surrounding it and don’t research. Key distinction to keep in mind.
The next pearl of wisdom: risk is EXCHANGED, never eliminated. Not even in regards to bitcoin, if you’ve read or watched “The Big Short” you know that the sentiment with housing was risk-less. We all know what followed. To define the statement: a buyer has the risk the investment will decrease in value, while the seller has the risk the investment will increase in value after it’s sold. The latter is often not given the proper attention. Patience is often overlooked and in order to properly sell, you must have patience. So, next time you see “Risk Free”, ask lots of questions.
So back to bitcoin, it has grown tremendously in value. It’s a similar story to Amazon, Microsoft, IBM, Facebook, and the list could go on forever of hot growth stocks. The problem with growth stocks is that it’s a lot harder to maintain explosive growth the larger you get. A company worth $1 only has to grow 1 more dollar to obtain 100% growth. A $10 Million company has to find $10 million worth of business to obtain the same growth. So because bitcoin has already grown so much it only gets harder to grow from here. To really hammer the point home, when you start from nothing there’s only upside, you can’t have any less than nothing. When you have $100 million you have to struggle very hard to find growth.
You can invest in bitcoin, but don’t expect amazing short term returns. The last point I want to make is about approaching investing. The typical thought process is the amount of return you seek should depend on the amount of risk you can take. Higher risk = higher return. WRONG! The amount of return you seek should be based on the amount effort you put in. If you can’t research stocks for hours a day, then why would you expect the stock recommendations you read during lunch break to give 300% returns? If you don’t put in the disproportionate amount of effort then why would your returns be disproportionate?
In short, if you can’t research thoroughly strive for average returns. Average is fine: with a starting principal investment of $5000 and monthly deposits of $100 continued for 50 years (lets say you start at age 20 until 70), assuming you have a modest 6% yearly return, what’s the end amount? $10 million? 50? 100? No it’s: 10 quintillion! That’s 10,000,000,000,000,000,000. So before you knock modest returns, if you stick in the long game it pays.