Crypto reveals common investment errors
An estimated 20 percent of Americans own any form of cryptocurrency, suggesting that many readers of this column are unlikely to own any Bitcoin, Ethereum or Dogecoin. This is good news since the three supposed saviors of the US economy have fallen 60 percent this year, wiping out $ 1 trillion in investor capital.
But the collapse of the crypto market reminds me that if investors could avoid just a few basic and common mistakes, they could avoid many unprofitable moves.
Never invest in something you can not just explain, ideally for a child. This one rule would prevent many large investment losses.
Do not attribute any degree of competence simply because of their media presence. CNBC regularly has so-called experts from large investment companies who talk about crypto as a legitimate asset class that should be in every investor’s portfolio, such as owning some stocks and bonds. Having a fancy title and being on TV simply means that you are a good communicator and are available. Popularity does not provide competence.
Never confuse luck with talent. A rising tide lifts all ships, but as Warren Buffett eloquently reminds us, it is only when the tide goes out that we get to know who has swum naked. Many people swim naked and do not even know it. If 100 people organized a coin flipping contest, the final winner would have predicted head / tails correctly six times in a row. He would be foolish to assume that he had any special skills in calling a coin flip.
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The same goes for the person who has a feeling that the stock market is about to go down and then sells all their shares immediately before a big fall. That’s luck. And if luck got you out of the stock, it will take luck to get you back at the right time.
Depending on luck as an investment strategy reveals an even more fundamental investment flaw: not having any strategy at all. If you do not have a strategy, you will almost certainly (and probably unconsciously) jump from one strategy to another, probably just as a particular strategy has reached a cyclical peak in its popularity and effectiveness. This means that you generally sell low and buy high – which is a terrible strategy.
Without a strategy, how do you know how to react when one of your investments makes a big price move? If one of your shares doubles in price, do you take the gain or do you buy more? What if it falls in half? Do you take your loss or do you buy more at a lower price? If you do not have a strategy, you might as well toss a coin.
David Moon, President of Moon Capital Management, can be reached at [email protected].
