A Rising Tide Lifts All Boats
A rising tide lifts all boats
One of the more famed adages of the investing world. Its mundane translation? That increasing returns can be mistaken for shrewd analytical acumen when it can be more accurately attributed to luck.
This is often attributed to people who are riding on the crest of a bull market wave, which is essentially what I was doing from March 2020 until the end of last year. It is also what many of my close friends are doing with the even higher wave which is the cryptocurrency market. I can even quote a good friend of mine, (who is an extremely competent human being) who said the following:
"Just keep buying. If it's a pyramid/ponzi scheme then who cares, just wait til you reach the top and then sell."
It was at this point that I realised that there are two ways (or steps) to investing...
Be the best boat
If I was to buy a boat. I would like one that is versatile. A combination of speed, weather resistance, and comfort. To translate that back into money terms, I want a portfolio that grows at a strong rate, is resistant to swings in market sentiment, and one I don't have to lose sleep over due to daily changes in price.
The 'return-chasers' that are rampant in cryptocurrency markets, are people I liken to speedboats. Fun while you ride, but it can fall foul to the volatility of the open sea. This is more an indictment of the people who buy crypto, rather than the underlying merit by cryptocurrencies as an investment decision. The same can be said for people buying options with days left on expiry before a company's earnings report. The 'return-chasers' are not strictly contained to the crypto markets.
In this environment, having the best boat doesn't necessarily mean being a good investor, but rather being the best of a bad bunch of investors. This is done by interpreting information where there is information to be interpreted. It's done by providing balance to the overall narrative, rather than believing its best possible iteration. It's done by being contrarian: sell when everybody is optimistic, and buy when everyone is pessimistic - at the turning points of the market.
I'm a 19 year-old with one and a half years of experience. So its hard for me to be 'the best boat'.
Bet on the Tide
One of the big problems for cryptocurrency investors is the correlation between Bitcoin prices, and the prices of its competitors in the asset class. Any analysis one does on a smaller, lesser-known currency can be undone by the general market sentiment, which right now is the general sentiment regarding Bitcoin.
Bitcoin is a 'tide-setter'. There are many reasons for this phenomenon. Currently, rival crypto projects' successes in the short to medium term, is dictated by the growth of the dominant force these projects are sometimes looking to tear down. But it can be simplified into the fact that understanding the ecosystem of cryptocurrency is extremely hard for people who are not extremely 'tech-savvy' which, for the time being, is most people.
But one person's ignorance is another person's opportunity. In this instance I've had success predicting the direction of currency movements by closely analysing Bitcoin, as it is currently the nucleus of the crypto market's psychology, and instantly you can save yourself a lot of pain by making sure you're betting on the direction of the market as well as your individual investment.
Howard Marks, one of the top fund managers is aware that above all else, that markets are dictated by psychology rather than logic. He cites that it was drilled into him from his rookie days that "The stock market is driven by greed or fear," or by some combination of the two. If the market is driven primarily by one, its very hard to back the logic flowing in the opposite direction with your own money.
Peter Schiff, a longtime supporter of gold has been continuously pointing to the lack of fundamental support behind rises in price. And to be fair, he has been right in his analysis, but in the five years since I started following him, the value of American stocks has doubled.
So generally speaking, don't fight the tide. Historically, more money has been lost betting against the market versus losing money on stocks during negative market shocks.
Takeaways
Don't mistake returns for investing wisdom
Don't get caught up in chasing immediate returns
Paying attention to the mass psychology of the market can help avoid major headwinds
In general, be skeptical of the source of whatever success you may experience
Coming Soon...
A Bubble Ready to Pop?
Success on the Horizon