Post by anenro on Dec 3, 2022 21:17:43 GMT 4
FTX, Crypto, AMC and GME and Why You Got Burned
Let me preface this article by saying I’m painting in broad strokes here. I get that there will be a percentage of people who have been successful investing in these things. My reader must understand that these success stories are the anomaly, a statistical likelihood that at least some people who roll the dice will have it land the way they had hoped. Unfortunately, this is not the vast majority.
The Fall
Cryptocurrencies and meme stocks like AMC and GME have a common thread: their rise in value was unrelated to the actual performance of the underlying “asset”. That is to say: the value went up because the next chump in line was willing to pay more for it than the last. This becomes very dangerous when this value rising is detached from any physical company or asset actually performing well, or actually increasing in value (like a brick of gold for example). If the buyer of these assets is simply buying on hopes that some other fool will pay more money for it at a later time, eventually this house of cards will come crashing down. And it did.
Some of the biggest cryptocurrencies are down an average of 60% since January. GME stock is down 30% since January, 67% since its highs. AMC is down 69% since January, 86% since its highs. Investors, especially new investors, need to be weary of a few red flag events to not get caught and burned in these traps.
Hype
A big problem here was that there was little to no fundamental value attached to the businesses or assets, and they really ran on hype. The media took hold of it and kept telling stories of normal people making crazy amounts of money investing in these things. The more people heard about it; the more random unsophisticated investors bought in which drove prices up. When everyone is talking about “the next big thing” and even your cousin Ryan is telling you have to buy this thing, it’s probably too late. Eventually you run out of buyers who are willing to pay more than the last guy, and the rug gets pulled, wiping out a ton of investor money.
Crypto and the Lack of Regulation
The regulatory environment for cryptocurrencies and exchanges is flaky at best. A number of regulators seem to be working on creating frameworks to govern cryptos, but the whole selling point of cryptos is decentralization, which makes regulation very difficult. This in some ways can be a positive, but as we’ve seen with the collapse of FTX, is a huge problem. I’m not sure how it’s going to turn out, and I don’t know enough to comment as to whether regulating such an asset is a positive or a negative, but I will say that a lack of regulation enables bad actors to take advantage of people. This is a huge red flag for me, and one of the big reasons I don’t touch crypto as an investment.
Buying What You Don’t Understand
This is probably the number one mistake I see new investors make. If I ask why, you bought a certain asset and your answer is “because Jimmy said it was good”, then you’d better sit down and rethink your investment. If you get angry when told your investment thesis has some holes in it, you’d better take another look at it.
It’s important to understand what you’re investing your money into. You need to have a good understanding of how this thing you’re investing in is going to reasonably appreciate in value, and if your sole thesis is that somebody else will pay more for it than you did, that’s not investing, that’s gambling. If you truly believe in an asset, I’m happy for you, maybe it is a good investment. But if you have such strong convictions, you better have done your research. You work hard for you money, and if you’re going to bet a bunch of it on something why wouldn’t you put in the time to learn everything you could about it?
Short Term Mindset
Rome wasn’t built in a day. You’ve heard that a million times before, and that’s because there’s truth to it. The human brain is interesting. Our world has evolved and become so complex over the last couple hundred years, but our brains are still stuck in some ways in primitive caveman ways of thinking. We value instant gratification, and it takes conscious effort to override that urge. What’s really interesting about that is think about all of the significant accomplishments you’ve achieved in your life. How many of them were the result of a quick effort lasting maybe a couple of hours or days? I’ll bet the answer is very few. Trying to lose weight and get fit? It takes planning, hours of effort, and weeks and months of execution before you get the desired result. Got a college or university education? How long did that take you? What did that effort look like? And yet with this mountain of proof that long term thinking yields amazing results, the second we hear that Zach down the street made 10 grand investing in some random thing, we get this monkey-brain urge to just jump on that bandwagon.
I’ll tell you a secret: The easy road is a lie. It doesn’t exist. Stop trying to get rich quick, it’s very unlikely. Create a realistic, long-term plan and stick to it. I find it absolutely crazy that everyone wants to be rich, and it’s been proven time and time again that by being consistent with diversified investments over a long period of time it’s actually LIKELY that you’ll end up rich, but very few people actually even attempt to go down that path. You need to stop trading your future for what you want right now.
Play the odds
If you’re still with me in this article and you’re pissed that I don’t like your investment ideas, let me drop you a breadcrumb here. I will support your decision to throw some money at whatever crazy thing you think is going to be the next Amazon (or whatever). HOWEVER — this needs to be done in a thought-out, controlled manner.
I acknowledge that early investors in Bitcoin and some other cryptos have made an absolute killing. I also acknowledge that some people made out pretty well through the AMC and GME saga. I haven’t been saying that it’s not possible to make money on these things and I don’t mean to s*** on everyone that buys them. This article is intended to get people to think through what they are doing and not jump on bandwagons. So, with that in mind, let’s talk about odds.
The odds of turning a profit in the stock market with a diversified portfolio over a long timeframe approaches 99%. This takes consistent investing and discipline and will have a somewhat predictable return. Every now and then however, a certain company absolutely explodes in value and if you happened to be in it, it can be life changing. I think it would be foolish to not even try to hit it big.
Believe it or not, you can still invest in the risky thing without putting your financial future in jeopardy. I personally put around 5–10% of my total investing portfolio into what I consider to be “riskier” investments. I don’t blindly throw this money at a dartboard and hope for the best, there is logic and reasoning to why I think these things have a real shot at explosive upside, but I understand there is also huge risk involved, so I limit my exposure to it. If this risky investment idea is correct and it pays off, I don’t need to have tens of thousands of dollars invested in it to make me rich. Imagine you had invested just $1,000 into Amazon stock in the early 2000’s. Today that would be worth over $170,000. If you bought Monster energy drink stock around 2004 with $5,000, you’d be sitting on over $650,000 today. $3,000 into Apple stock just before the 2008 housing market crash would be worth nearly $200,000 today.
My point is, if you’re going to roll the dice on high-risk stuff, make it a small portion of your overall portfolio, and maybe spread your bets around.
A bit of humor.
SOMEONE ASKED: "How do you become a millionaire buying Bitcoin?" The answer: "You have to start by being a billionaire."
Let me preface this article by saying I’m painting in broad strokes here. I get that there will be a percentage of people who have been successful investing in these things. My reader must understand that these success stories are the anomaly, a statistical likelihood that at least some people who roll the dice will have it land the way they had hoped. Unfortunately, this is not the vast majority.
The Fall
Cryptocurrencies and meme stocks like AMC and GME have a common thread: their rise in value was unrelated to the actual performance of the underlying “asset”. That is to say: the value went up because the next chump in line was willing to pay more for it than the last. This becomes very dangerous when this value rising is detached from any physical company or asset actually performing well, or actually increasing in value (like a brick of gold for example). If the buyer of these assets is simply buying on hopes that some other fool will pay more money for it at a later time, eventually this house of cards will come crashing down. And it did.
Some of the biggest cryptocurrencies are down an average of 60% since January. GME stock is down 30% since January, 67% since its highs. AMC is down 69% since January, 86% since its highs. Investors, especially new investors, need to be weary of a few red flag events to not get caught and burned in these traps.
Hype
A big problem here was that there was little to no fundamental value attached to the businesses or assets, and they really ran on hype. The media took hold of it and kept telling stories of normal people making crazy amounts of money investing in these things. The more people heard about it; the more random unsophisticated investors bought in which drove prices up. When everyone is talking about “the next big thing” and even your cousin Ryan is telling you have to buy this thing, it’s probably too late. Eventually you run out of buyers who are willing to pay more than the last guy, and the rug gets pulled, wiping out a ton of investor money.
Crypto and the Lack of Regulation
The regulatory environment for cryptocurrencies and exchanges is flaky at best. A number of regulators seem to be working on creating frameworks to govern cryptos, but the whole selling point of cryptos is decentralization, which makes regulation very difficult. This in some ways can be a positive, but as we’ve seen with the collapse of FTX, is a huge problem. I’m not sure how it’s going to turn out, and I don’t know enough to comment as to whether regulating such an asset is a positive or a negative, but I will say that a lack of regulation enables bad actors to take advantage of people. This is a huge red flag for me, and one of the big reasons I don’t touch crypto as an investment.
Buying What You Don’t Understand
This is probably the number one mistake I see new investors make. If I ask why, you bought a certain asset and your answer is “because Jimmy said it was good”, then you’d better sit down and rethink your investment. If you get angry when told your investment thesis has some holes in it, you’d better take another look at it.
It’s important to understand what you’re investing your money into. You need to have a good understanding of how this thing you’re investing in is going to reasonably appreciate in value, and if your sole thesis is that somebody else will pay more for it than you did, that’s not investing, that’s gambling. If you truly believe in an asset, I’m happy for you, maybe it is a good investment. But if you have such strong convictions, you better have done your research. You work hard for you money, and if you’re going to bet a bunch of it on something why wouldn’t you put in the time to learn everything you could about it?
Short Term Mindset
Rome wasn’t built in a day. You’ve heard that a million times before, and that’s because there’s truth to it. The human brain is interesting. Our world has evolved and become so complex over the last couple hundred years, but our brains are still stuck in some ways in primitive caveman ways of thinking. We value instant gratification, and it takes conscious effort to override that urge. What’s really interesting about that is think about all of the significant accomplishments you’ve achieved in your life. How many of them were the result of a quick effort lasting maybe a couple of hours or days? I’ll bet the answer is very few. Trying to lose weight and get fit? It takes planning, hours of effort, and weeks and months of execution before you get the desired result. Got a college or university education? How long did that take you? What did that effort look like? And yet with this mountain of proof that long term thinking yields amazing results, the second we hear that Zach down the street made 10 grand investing in some random thing, we get this monkey-brain urge to just jump on that bandwagon.
I’ll tell you a secret: The easy road is a lie. It doesn’t exist. Stop trying to get rich quick, it’s very unlikely. Create a realistic, long-term plan and stick to it. I find it absolutely crazy that everyone wants to be rich, and it’s been proven time and time again that by being consistent with diversified investments over a long period of time it’s actually LIKELY that you’ll end up rich, but very few people actually even attempt to go down that path. You need to stop trading your future for what you want right now.
Play the odds
If you’re still with me in this article and you’re pissed that I don’t like your investment ideas, let me drop you a breadcrumb here. I will support your decision to throw some money at whatever crazy thing you think is going to be the next Amazon (or whatever). HOWEVER — this needs to be done in a thought-out, controlled manner.
I acknowledge that early investors in Bitcoin and some other cryptos have made an absolute killing. I also acknowledge that some people made out pretty well through the AMC and GME saga. I haven’t been saying that it’s not possible to make money on these things and I don’t mean to s*** on everyone that buys them. This article is intended to get people to think through what they are doing and not jump on bandwagons. So, with that in mind, let’s talk about odds.
The odds of turning a profit in the stock market with a diversified portfolio over a long timeframe approaches 99%. This takes consistent investing and discipline and will have a somewhat predictable return. Every now and then however, a certain company absolutely explodes in value and if you happened to be in it, it can be life changing. I think it would be foolish to not even try to hit it big.
Believe it or not, you can still invest in the risky thing without putting your financial future in jeopardy. I personally put around 5–10% of my total investing portfolio into what I consider to be “riskier” investments. I don’t blindly throw this money at a dartboard and hope for the best, there is logic and reasoning to why I think these things have a real shot at explosive upside, but I understand there is also huge risk involved, so I limit my exposure to it. If this risky investment idea is correct and it pays off, I don’t need to have tens of thousands of dollars invested in it to make me rich. Imagine you had invested just $1,000 into Amazon stock in the early 2000’s. Today that would be worth over $170,000. If you bought Monster energy drink stock around 2004 with $5,000, you’d be sitting on over $650,000 today. $3,000 into Apple stock just before the 2008 housing market crash would be worth nearly $200,000 today.
My point is, if you’re going to roll the dice on high-risk stuff, make it a small portion of your overall portfolio, and maybe spread your bets around.
A bit of humor.
SOMEONE ASKED: "How do you become a millionaire buying Bitcoin?" The answer: "You have to start by being a billionaire."