When I'm Asked For Investment Advice
Someone I know recently approached me and told me they had decided to put $150,000 to work in cryptocurrency over the next 2 months. This person found out that I have a trading background and have been invested in cryptocurrencies since 2014. He wanted to know what my advice would be for how he should execute this.
I realized that I’ve been asked this sort of thing before and it always makes me cringe because I basically don’t give advice - I tell people my experience and how I’m wired, and then I ask a lot of questions.
So basically here’s how I responded.
I’m Different Than You.
I always preface these conversations with the fact that I have different experiences and risk tolerance that shape how I look at investments.
For instance, I’m actually very conservative generally, but can get aggressive when I have conviction or an ‘edge’.
I trade stocks, but generally don’t have a high % of my net worth in public markets. I instead tend to use a barbell strategy.
I’m willing to miss the move. I generally don’t have a lot of FOMO. That goes as much for social situations as investments.
I have a trading background and years of experience making mistakes and losing tons of money.
Specifically, with respect to crypto - I’ve been invested since 2014 and am completely playing with the house’s money. This is an important psychological difference.
I have no idea.
Sometimes when people ask for ‘advice’ they just want to know which direction I think a market is going. Truth is, I have no idea, and neither does anyone else. So, I have to make decisions anyway in the face of uncertainty and get comfortable with not knowing. I think that’s the biggest growth area for me over the last decade - I’m simply ok with the idea that I don’t know what’s going to happen in my life.
Because I don’t know, I prize my ability to be flexible and change my mind. If you haven’t noticed, I use the word “generally” a lot and rarely use the word “always.”
That also means I don’t commit before I commit. My investment approach is the opposite of my goal setting approach. With goal setting you want to tell a bunch of people you will do X, because that makes you more committed. In investing, I want to give myself as many outs as possible so I can easily change my mind.
Psychology is the most important variable, and the least understood.
Most people can talk themselves into making an investment by telling themselves “price doesn’t matter because I’m going to hold this for X years and it will be higher then.” I’ve done this too. But what happens to your nerve is very different in reality.
Like if you bought bitcoin in 2017 at $15,000, or maybe you waited till $10,000, or even $6,000 like I did, only to watch it go to 3 (twice). Do you really think you’re going to be Mr. Coolhead when you’re down 90% and you have to wait 3 years for it to come back?
No, you’ll start to craft a new story about how things have changed and you’ll puke.
I’ll be totally honest, the ONLY reason I was able to hold from $20,000 to $3,000 back up to $40,000 with the size I had on is because I already had a locked in profit from being early and trading bitcoin in the run up in 2017. I locked in a profit, so bitcoin could go to 0 and I’d still make money.
Playing with the house’s money makes all the difference in psychology.
So what actually does matter in investing?
Maintaining perspective. The easiest way to calculate whether or not you have perspective is to answer “Am I able to sleep at night?” To answer this question well, you have to ask yourself several sub questions:
Why am I getting into this trade? My experience is that the simpler the thesis, the more core conviction. My bitcoin thesis from 2014 is the same as it is today. World governments are printing money and devaluing their currency. Investors are looking for a transferable store of value. I couldn’t tell you anything about the merits of other cryptocurrencies relative to each other. That is a more complex game.
Does the amount of money I’m risking matter to me or my family? You have to reduce your size down to the level at which you can sleep, period. It’s better to participate with a quarter of your size than to put on the full boat and not be able to hold through a dip.
If this goes against me am I going to be checking my account like a crazy person? I’ve lost so much sleep and time constantly checking investment positions. It’s a productivity and energy nightmare. Pare your size down to what you think is embarrassingly small, so you can still function as a human being.
Is the amount of money I’m risking represent a reasonable amount of my net worth given the uncertainty or risk profile of the investment? Because I don’t know, and I recognize that I definitely can be wrong, I don’t want any one investment to make up too big of a percentage of my net worth. Especially if the bet is highly speculative.
What is the likelihood I will need to access this money in the near term? Have you insulated this bet from your day to day needs? In other words, do you have enough cash or other sources to cover unexpected emergencies while this bet is compounding? The worst thing in the world is a forced sale.
I guess, I'm realizing I probably didn't answer this guy's question . . . but what I'm trying to say is the best investment is one I can hold either because I'm comfortable or I have defined risk or I believe it should be done no matter the consequence, or I've found a way to lock in a profit, so I can press. I need to guard against, and remove anything that is going to stand in my way of holding on - there are many.