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 ]