We were just having a very interesting discussion at work about investing approaches and I noted how great it is that while taboo only a few short years ago, at least in some circles, it has become quite open. One of the reasons for this is that "saving money" has become a cost, so people who had a pretty simple investment strategy of just putting it in the bank, now have to be more proactive and find a suitable investment vehicle.
However while we were talking one of the guys mentioned three rules from some investor and I think they are okay... but there is nuance that should be considered.
The rules:
- Do not invest more than you can afford to lose
- Do not invest into something you don't understand
- Gains are made in the long term, loss in the short
1. Do not invest more than you can afford to lose
Ok. Not a bad starting point and the first one I agree with and generally add, "completely" at the end of the sentence. However, that is when taking a very, very conservative approach, which is what I would do when a new investor is asking me about options. Yet, there are nuances in this position too, as a person would have to consider what "completely" means, as it will be very rare that an investment goes to zero completely.
There is also something else to consider, as while a person doesn't want to lose, I think it is also consider what kinds of problems that loss would cause. For example, if I need 1000 dollars in six months and I invested it and lost it today, what would it take me to recover from the loss? This will have to factor in my future earning potential also and whether I am willing or able to make life changes to recoup the loss. In this way, the loss incurred is taking on debt.
The other thing to consider is what that future value means and what it means not to have the gains. For example, if in 6 months I need 2000 dollars and have 1000 now and no way to get the additional 1000 through normal living, if my "life depends" on it, I essentially have to swing the bat. Although not a common example in this case, if you imagine someone who hasn't prepared for retirement enough, but have to have something in order to survive it. If they have a fraction of value, is it better to prolong "death" for a short period, or take the risk of dying a little earlier financially, but opening up the potential to survive well until "true death".
In my own experience, some people can't afford to lose - but they also can't afford not to invest. The little they will lose will have very little impact on their life well-being anyway. Does it matter that you become reliant on a government pension from day one or on day 365 if living for 20 years past retirement?
2. Do not invest into something you don't understand
This is a commonly heard investment rule and many very large investors will purport to follow it, but do they actually stick to it? Does a person need to understand the product, or do they need to understand the market? I would predict that a lot of people who follow this rule will suffer from their knowledge of "knowing the product", while not understanding the market. While someone like Warren Buffet can in 2008 invest 240 million through Berkshire Hathaway into BYD, an electric car company, I am pretty sure that he didn't need to know the business, just see the potential in the marketplace for the industry. I am sure they did some due diligence of course, but that investment is now worth about 7 billion. My point is, people do not necessarily consider the importance of what kind of knowledge they have about their investment.
But perhaps, the more important aspect of this rule that I disagree with is, that it is actually good to invest into the unknown, because having skin in the game creates the motivation to learn. Investing isn't an all or nothing game for the most part, meaning that if for example a person was going to invest 1000 dollars into something they don't know about, it is possible to invest 10% of that in at first, to give the drive to learn more. People do not like to lose any amount and will therefore protect themselves, and learning is part of the protection.
I have fond that the people who are the most active on Hive for example, are those who have not only earned, but also bought even a small amount of tokens. Skin in the game matters a great deal to our personal incentives and potential energy expenditure.
3. Gains are made in the long term, loss in the short
Again, I agree and understand the sentiment in this statement, but like the first, this is going to depend on personal circumstances and perhaps more importantly, the amount one is able to invest. If the amounts of disposable income are small, but the future needs large, investing small amounts long term might not reach the future requirements. This again means that at least with some portion of the investment, an aggressive strategy is required, meaning that a higher risk-reward model can be adopted with any gains rolled back into both sides of the investment sheet, where for example, 50% of the gains get shifted to a long-term position, 50% moved into the next potential pump. This can be adjusted based on the amount of gains made, but it should be considered.
It is different if investing large amounts however, where compounding gains over time make a very large impact on the totals. The more investment capital one has in comparison to the life needs, the lower the return cutoff needs to be, and as long as the life needs do not expand significantly, new gains get rolled back in to advance the next round of profit taking.
For example, if all I had was 10 dollars a month to put into investments, very few long-term investments will provide a significant outcome without a lot of luck like buying Bitcoin at a dollar and holding for 12 years, which at the time would have been considered a high risk investment. While ten dollars is not much, a very active investor who is watching the crypto markets daily, could turn it into significantly more, with a little luck.
Just to finish up
While I am not much of a trader, there are a lot of rules in life that are given as advice, but without actually considering them more deeply, will be detrimental to outcomes or not offer significant return. There is very little change in my life in me being able to say I got 500% returns, if I only invested 10 dollars, as it is not enough to make a difference. But, if I invested 10,000, that would provide change potential, especially if from there I am able to take that 50,000 and split 40 of it into a long-term position for the next twenty years, while keeping 20% to spread and keep rolling the dice, winning some and losing some along the way, continuing to move some of the wins to mid to long positions, some into short gains and some, into positions where I want to learn more about.
At the end of the day, I think that the most important parts of investing are an understanding of personal circumstances including mindset, and future expectations for needs. It doesn't matter what we do, there is always risk involved and sometimes the riskiest position to take, is one that reduces risk to the point that activity becomes irrelevant.
Taraz
[ Gen1: Hive ]
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When asked about entering crypto as an investment by someone around me I tell them to learn by doing. I encourage them to invest just a few euros so they experiment with it. As you do have even a very small skin in the game you start getting more interested and willing to learn. Then you can move from there always respecting the three rules.
One of the greatest things in crypto is that you are free to jump into any asset or DeFi service and only invest a few dollars (as long as fees are low). This was impossible in many of the traditional markets regulated by exchanges where you had to sign a contract with a broker and fund your account only to start.
It took me a long time to buy my first, but once I did, things changed in the way I approached it all. It helped me pay attention and see it from another perspective. The hardest thing was that first purchase.
It ends up not making it worth it, which cuts out a large portion of potential investors. How can you buy 5 dollars of Apple and what would it cost?
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It is amazing how hard and costly it is in traditional markets and how easy it is becoming to buy a synthetic asset representing the company equity with crypto. Just using services as synthetix or Mirror which ara already offering those products in the Etherem and the Terra blockchains.
I think I agree with each of the three rules you have mentioned here, but as an investor, one of the pieces you must move is precisely that of risk. While it is true that if you risk you can lose, if you risk you can also win. I knew a guy who had only one asset: his house, and he sold it to start a business. People pointed him out and judged him as crazy. The guy now has a business with some profit and two houses, one of them on the beach. It was a risk, but he took the plunge and won. And you certainly have to know, study, what you are going to invest in and especially listen and read who knows. You have shown to have some knowledge in this matter, maybe that's why you are at the top of the most profitable authors in Hive. Congratulations and keep up the success. Greetings and thanks
I think the other aspect of the starting the business is a personal reward of providing for the self, rather than relying on others. A lot of people seek security, even if it lowers their own life satisfaction.
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We also need to think about the opportunity cost. If i think of long term and invest a very small amount then it will not be big enough to have a significant impact. I would rather invest in one known/unknown product and have significant gains. Not investing is tough. Now, i think about all those years where i let my money sit in the bank account and do nothing and regret.
I think Hive and crypto in general have shown me new aspects of investment.
I was talking about this with the guys today, except I was saying how I had no money in the account and regret it, because when opportunities arose, I had no way to take advantage.
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Wonderful post and great advice. I've stumbled across your blog as @galenkp informed me you were brothers. Such a power family. Well done.
I've enjoyed the last few blogs of yours that I have read.
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Cheers mate. Galen is a bit of a machine these days :)
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Rule #3. Repeat!
Mighta just found my next tattoo
Would it be a tramp stamp?
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LoL!
This is an excellent post. Your answer mentions a lot of the important nuances when it comes to these maxims.
Quite often, a measure of potential loss must be accepted in return for a chance to gain. Particularly when the potential gains are life-changing, accepting potential non-life changing losses is really a no-brainer.
Crypto is a perfect example of why #3 is not necessarily true. In Bitcoin and many altcoins the largest gains are made after extremely powerful rallies that take place within just a few weeks. The losses typically take much longer to materialize. Buying a bag of shitcoins at the top and holding it too long is the worst mistake one can make.
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There are quite a few more embedded and they splinter into more.
I think perhaps mentally, the brain just hears "loss" and often we treat all of them rather the same, without looking at the different perspectives of each.
Are you in the market for some bags? :D
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If you're talking about shitcoins, I believe it is too late. :D
Sir, you have given very important information about investment relations and explained them with examples. I gained some knowledge about investing by reading your article. Thank you so much for sharing this beautiful article.
Hope it helps you in some way.
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I learned a lot about investment today. Thank you.
Nice to hear!
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Yeah, that second one would bite probably about half of the people who are invested in Cryptocurrency right now if they followed it to the letter. I like the one about not investing more than you can afford to lose. The funny thing is, many of us already do that with things like retirement savings, etc. I feel like I put a ton of money into the traditional markets and while I am used to the expense coming out, if I were to lose it, that would be a huge deal. I do it anyway though, every paycheck!
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Yep, most peoplein crypto have no idea about the tokens they are buying and I reckon some just purchase on the little bits of info people provide, people who are internet randoms. I know I have done so in the past, and I am sure I am not alone.
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Ditto!
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Right, I'm also going to get into growth more than trading I have evs, cardono, and vechain. I would like to trade crypto and stock options now that I realize last year I've lost a lot of potential selling myself short now I see even if your in the money things could be even better in the long run, Definitely into going further with good companies and crypto
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I think that part of the process of building an investment strategy, is learning from having a bad one. At least for me, it taught me a lot and made me far more dedicated to learning.
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Learning is the best thing in the world and hey I've taken losses when all I should've done was hold the line your not alone brother
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I think that risk is the investors friend. When there is risk then there is opportunity for gains. On the condition that the project you invest in has a solid plan and good people that run with it.
When you have less money, you need more risk to make a change in your personal circumstances.
Yep and it is going to depend on where you live and current/future obligations too. I know that some people have significant amounts to invest, plus they live in low-cost countries, which offsets the gains needed.
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Very true. Crypto is global, so for some people it is way easier to benefit significantly than others.
I guess 90% of breaking the second rule in crypto, just buying anything without understanding.
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90% of people buy in the hope for a pump to sell into - nothing more. In the longterm, crypto has to mature past that and build products that people want to own for life and even over generations.
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Yeah, but we still have few good option. Just keep wondering how a tweet or tik tok video just pumps a coin.
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weird that we as "europeans" are so used to writing dollars online when we are talking about money
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It is a conscious decision for me, since so much of crypto is done in dollars. Also, it is more natural than euros, since I am Australian. Even before crypto, I used dollar more than euro in conversation and had to often correct it.
It is interesting though, as I tend to use US spelling also when I wrote as originally most readers were US based. It has actually helped me in my work as the company language is English, with a US slant.
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I have heard of the first rule, not so much the other two rules. They are good rules to use when investing.
Rules are often simplified and inflexible. When someone understands the reasoning behind them, finding nuances and flexibility, then they become even more powerful tools. And that's what you did so well in your post.
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Investment is like risk taking so don't go all in.
Thank you for the post I am here to learn and this was good advice for me.