All investments require a decision to buy and some have a requirement that you know when to sell. BitCoin is presently an example of a two-decision problem.
The more volatile the investment the greater the requirements to know both ends. A value investor needs only a way to assess intrinsic value and when markets vary greatly from that assessment, they buy or they sell. As Buffett has said, markets are bipolar. Value investors make money by trading against emotional blemishes in the market prices.
The decision is then only one dimensional. Is the price in the market so far enough away from its intrinsic value that it makes sense to either buy or sell?
If I assume being right is a 50-50 proposition, I will be right half the time. But, if the decision requires that I both buy right and sell right, at 50-50 on each, I will be right only once in four times. In the long run 3 errors in 4 is not the way to financial success.
If we look at the value investor approach, the decision could be either buy, sell, sell short, or do nothing. Doing nothing is by far the most common. They look like different decisions, but they are not.
All of them are relational. If I know intrinsic value and I see the market behaving in ways that are irrational in respect to that, I do whatever is required to optimize my position. All I am required to do is maintain a clear and updated idea about intrinsic value. Hard, but at least rational.
In the late ’60s the market was quite bubbly and there was a group of stocks that were in great demand because of their growth prospects. National Student Marketing Corp was one of the more famous. NSMC and others were touted as one decision stocks. The buy decision was the only one that mattered. How well did that turn out?
As you might expect, not well at all.
When you expect a stock to rise, but cannot identify the values that must change to make it happen, you are gambling. Traditional measures like profit margin, market size, market share, innovation, rate of change in sales, competitors actions, and cost containment, lead to value changes. You can identify these and assess value because improvement in these leads to improvement in net free cash flow and that is what drives business valuations.
Believing a security will go up because it has been going up is like believing in magic. Outcomes with no connection to fundamental inputs. Eventually, fundamentals win.
If you have a high fear of missing out, you will be tempted to play in markets that are essentially driven by magic. You can play the game if you wish, but you should realize it is magical thinking.
In the gold rushes of the late 19th century, prospecting and mining provided poor results. A few made a lot of money, most lost all their money. Their was, however, one group who made reasonable returns. The people who supplied the materials miners and prospectors needed.
Think suppliers of food, tools, clothing, tents and the like. How could you go wrong? People had to buy your goods. Banks and assayers did well too.
Who supplies materials in the bitcoin marketplace. Nvidia supplies the boards bitcoin miners like in their computers. Maybe a bitcoin exchange would be a good investment. While they might be hurt by a change in mania for BitCoins, they will be less volatile than the coins themselves.
Think it through. Your goals involve money far in the future. Risking money you might need for money that is based on magic seems wrong.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.
In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 866-285-7772
Thank you, Don, you have helped me a great deal with your insight into the subject matter. I have noted with disbelief the growth in the Bitcoins over the time. It has been unbelievable in the past days and one wonders when is the bubble going to bust. I have been very frank with my clients that I do not understand or have substantial knowledge about this and have relied on the tidbits from you guys.It is very scary