I came across an interesting article of a man that invested around $120K into bitcoin in November 2017. In just one month, that investment turned into $500,000. In the ensuing Crypto Crash, this man lost 96% of his initial investment, which would put his account at about $4,800. There are a few things that stuck out to me about this story of speculation, naivete, and greed, that is as old as commerce itself.
There is no way to ascertain the intrinsic value of something like Bitcoin, because there is no fundamental analysis that can be done. There aren’t any underlying cash flows or assets, but instead it is basically a bet on non-conformity. There were many millionaires that came out of these speculations into Bitcoin and other cryptocurrencies, but there also many people like this man that lost their savings from it. The problem with speculation is that at some point your luck will run out. It is nearly impossible to speculate once, strike it rich, and then give up trying to do it again. It is akin to playing the slots at the casino in Vegas. If you have an amazing trip and turn a few hundred dollars into $10,000, you might be on a tremendous high. All of the sudden you are telling friends about your genius strategy to beat the casinos at their own game, but the reality is that you made a speculative bet that got lucky.
Ultimately, the odds are working against you. In something that generated as much publicity as Bitcoin, there were and still are no shortage of hucksters who will take advantage of those looking to play a game that they don’t fully understand. Many people would say, “I believe in blockchain technology,” and then would equate that to Bitcoin. Blockchain is basically a digital leger with global capabilities. It is a wonderful technology with many practical uses but just because Bitcoin uses it, doesn’t make Bitcoin a great investment. I have no idea what Bitcoin or other cryptocurrencies will do in the future but if you are going to speculate in any of them, I’d suggest only ever using a tiny portion of your portfolio that you can 100% afford to lose. If you ever had the good fortune to turn $120K into $500K, I’d urge you to at least take your cost basis out of that so that you are only playing with profits. In 100% honesty, I’d recommend just staying away.
“In 100% honesty, I’d recommend just staying away.”
One of the reasons why value investing has been such a successful strategy for such a long time is that it makes intrinsic sense and is repeatable. Value investing is about performing extensive fundamental analysis on companies and their securities. We then only attempt to buy the securities when they trade at material discounts to our estimates of intrinsic value. By doing this we ensure ourselves of an adequate margin of safety, and the disconnect between price and value, gives us the expectation that we should generate investment profits over time. One of the things that makes value investing hard is that it is impossible to predict the timing of when price and value will converge. I believe that usually within three years, stocks tend to reflect intrinsic value at some point. In truly great investments, we are able to buy the securities at a major discount, and then the businesses continue to grow their intrinsic value by 10%+ per annum, generating extremely attractive compound returns.
A big mistake people make is looking at things over too short of a timeframe. For instance, looking at your performance over one year is relatively worthless. Any strategy can have a good year, regardless of its actual long-term merits. Investing is about behaving in a rational and repeatable manner over the long-term. This allows you to take advantage of Mr. Market. We are willing to sell when securities converge with intrinsic value, and we buy more aggressively when the disconnect widens. Many of our best returning investments have been driven by securities purchased at or near peak pessimism.
Today’s irrational behavior that is being marketed as rational is passive investing, with no attention paid to fundamentals. Surely, it is not hard for this to look smart in the rearview mirror of a 9.5-year-old bull market. However, if you adjust the time period to 18 years, the returns are about half as attractive. There have been multi-decade periods where stock returns were negative and that generally occurs when you pay way too much in the first place. Expectations seem way too high and many market participants seem to be ignoring the fact that at some point the indices will likely experience a 40-60% drop. When this occurs, how will they react psychologically? Will they sell and then miss the ensuing rally? If so, they are not passive investors whatsoever but are instead market-timers.
Many of the companies that market this approach use the S&P 500 as the benchmark versus other strategies, which they call active. This is highly misleading because then they use an asset allocation model to diversify the investments. This active endeavor means that their actual allocation models have underperformed the S&P 500 too. Passive is being used as a marketing ploy and when that happens, one should worry. At TTCM, we are fortunate that we have had really strong long-term performance, despite a miserable environment for many other high-profile value investors. I believe that when markets take a turn for the worse, our strategy should really pay dividends and provide far greater performance separation from those that are investing blindly. As value stocks grow into more favor, we believe that we are poised to benefit significantly. What is great about investing, is time will definitely tell the tale.
Below is a link to the article mentioned, which I hope that you will enjoy. Thank you very much and as always if you need anything at all or have any questions, please don’t hesitate to call me directly at 805-886-8140.