As investors, we have so many backward ideas when it comes to accumulating money… it’s no wonder so many people are just plain bad at it.
Before I begin, let me state that being an investor is different from being a trader.
A trader is attempting to flit in and out of financial assets to catch all the upside (or downside when shorting a stock) and get none of the losses.
More than making a lot of money on each trade, the trader wants to lose as little as possible on their losing trades.
Great traders create a “trading edge,” and they work that edge. Great traders are among the coolest customers you will ever meet.
On the other hand, the average retail trader is an emotional gunslinger. They’re a cowboy drunk on dreams of owning their own ranch once they hit the perfect winning trade.
Wall Street makes billions of dollars convincing “drunk cowboys” they can trade their way to financial nirvana.
Hopefully, by now you realize trading – while fun – should be treated more akin to going gambling in Las Vegas than a prudent wealth creation plan.
The world-class investor doesn’t think about financial assets this way. The world-class investor aims to accumulate a portfolio of underpriced assets that will continue to climb in value across each successive business cycle.
A great business will grow larger after every recession… not smaller. This is one of the key hallmarks of a great business.
The world-class investor knows the intrinsic value of the investment and can decide if something is cheap or expensive. The world-class investor understands how to value an asset.
The world-class investor knows there will be bull markets and bear markets. They use bear markets to buy stocks and bull markets to sell stocks they own that have become overvalued relative to their intrinsic value.
One other key difference: The world-class investor doesn’t use margin.
They don’t need it. Time and compounding are what they rely on… not razor-sharp perfect timing.
If you buy great assets and use no margin, it’s really hard to go broke. Eventually, the quality of the businesses you own combined with an improving business cycle will bail you out of bad market timing.
That’s not true if you’re trading on margin (and every trader I know uses some form of leverage). You can wipe out all your equity over a couple of really bad days.
That’s 100% wipe-out risk.
I don’t know about you… but I’m 51, and I don’t want to start over again.
Now, you can look at everything I’ve written so far and say, “OK, that makes sense when it comes to stocks. But what about crypto?”
Valuing Bitcoin Is Different
Bitcoin doesn’t have the same track record as companies like Pfizer or 3M. We can’t look at a chart and see how bitcoin has fared against 50 years of market cycles.
So valuing bitcoin becomes much trickier.
What is bitcoin’s intrinsic value? How do we know it’s cheap? When do we know it’s expensive?
I’ll write a follow-up essay that will answer all those questions.
For now, be assured that bitcoin is trading more than 50% below its current (as in now, not in the future) intrinsic value as measured by one of the most conservative valuation models I use.
That doesn’t mean it can’t get cheaper. It sure can… And this year, it probably will. That highlights bitcoin’s No. 1 perceived problem.
The problem with bitcoin isn’t its core offering…
Who wouldn’t want stateless money that’s limited in supply… and governed by a set of rules agreed upon by the majority of participants but changeable by no individual participant?
That’s a dream asset.
And it’s the reason why bitcoin has attracted the attention of some of the world’s savviest investors, including billionaires Bill Miller, Ray Dalio, Howard Marks, Tim Draper, Jack Dorsey, and many, many more.
The problem is bitcoin’s volatility. It’s crazy volatile.
I remember May 19, 2021, when I sent out a video update to my Palm Beach Confidential subscribers. Bitcoin had tumbled from an all-time high of $63,500 to $40,000 – a staggering 37% crash
Let me paraphrase what I wrote…
You must stay focused on the big picture. If the volatility makes your stomach churn, turn [your] computer off and go do something else. And I’m being stern with you today because this is where lives are made and lost… Right here.
You don’t pay me just for newsletters. That’s not even my primary job. You pay me for moments like this… To make sure you make the right decision.
And the right decision is to either hold or buy more. Do not panic sell. Unequivocally, you’ll look back on it as one of the worst life-destroying decisions you ever made [if you sell].
I want you to stay strong and trust in the facts of the research. We’re at the beginning of this adoption curve. One hundred million people hold crypto as an asset. Five billion people own mobile phones, which are gateways to the crypto market. And there are more than 7 billion people on the planet.
This is the beginning of the beginning. You better not be a sheep here. I’ll come find you. I promise you.
Like now, bitcoin wasn’t done going down. When it tumbled another 25% two months later, I had to use strong language again to keep readers from destroying their wealth by panic selling.
I told them it’s part of what I called the mid-cycle blues. Again, my language was blunt:
I know sitting through these mid-cycle sell-offs is about as much fun as getting a colonoscopy. Sure, your doctor tells you it’s a vitally important test… But who the heck wants to go through one?
It’s unpleasant and uncomfortable. You’d love to avoid it, but there’s no easy way around it.
So, welcome to your crypto colonoscopy.
At the time, my messaging might have come across as harsh or unfeeling. But isn’t it harsher and more unfeeling to be lied to or “managed”?
That’s why I don’t sugarcoat the truth.
And the truth is, the market is likely in store for more volatility ahead.
But markets move at their own pace. I say that because we’ve been very oversold recently and are only now starting to correct that by bouncing higher.
The bounce might even look like it has some legs to it. And I’d love to tell you we’ve seen the end of the bear market and nothing but blue skies ahead.
But I can’t.
In my opinion, stock indexes and crypto prices are due to bounce, but I believe once that bounce is done, they’ll retest and may very well make new lows before the year is out.
I’ll Always Be Honest With You… Good, Bad, or Otherwise
If you’ve read even a few of my letters, you know I’ll never insult your intelligence by telling you up is down and down is up.
There’s too much of that already on Wall Street and in the newsletter business. And you’re a grownup. You’re not a child.
When kids are little, you talk to them in a way that protects them from the realities of life… I refuse to do that with you.
Yet, I see Wall Street talk to clients like that all the time – even to me – and it’s infuriating. All I ask from the people I work with is to give me the unvarnished truth. It’s impossible to make good decisions if you’re not getting the facts.
It’s the same conversation I have with anybody who manages my money.
Don’t sugarcoat the problems. Tell me what they are, what your solutions are, and help me manage my expectations between now and the desired outcome.
It doesn’t matter if those solutions will take one month or three years. Just be honest with me.
That’s what I want as an investor. And that’s the standard I set for myself when I communicate with you.
I will never hide under my desk… because I can’t stand it when people managing my money have done that to me.
So as we navigate the market this year and beyond, I will always tell you what’s occurring… good, bad, or indifferent.
The Markets Bad, But They Won’t Stay Bad
So here’s the deal: After the oversold bounce has run its course, I believe there’s more pain ahead for equities and crypto.
But the good news is I believe the markets will close flat for the year.
That means there will be some terrific bargains to be had… just be patient.
The key is not to let volatility victimize you. Do not sell at lows and buy at highs. That’s the key.
In closing, let me say I realize I’m not everybody’s best friend right now. I get that.
You may want to send me some hate mail… and if it makes you feel better, do it.
As you pen your letter to me, remember this: As much money as you might be down, I promise you I’m down more… But I’m not losing sleep over it.
I own great assets… And if you are a subscriber of mine, you do too.
So stay strong.
We will ride out this bear market for however long it lasts. So long as you don’t do something dumb like sell your bitcoin or investment portfolio, you’ll exit from this bear market richer than when you went into it.
That’s the reward for holding on to great assets through a bear market and into the next bull market.
Let the Game Come to You!