Categories
Life

The easy reps don’t count

I don’t count my sit ups.  I only start counting when it starts hurting.  That is when I start counting because then it really counts.  That’s what makes you a champion.

Muhammad Ali

The easy reps don’t count.

If you are to make a success of yourself in this life, you must embody this mindset.

Everyone can do the easy reps.

The first 10 sit ups.  The first 20 lines of code.  The first 50 pages of a new book.  Anyone with moderate ability and application can do these.

If you want to excel beyond the average person, you must re-frame your thinking and re-base your starting point to where it first counts.

The point when it starts hurting.  This is no ground zero.  This is where your game starts.

Investing principles and your competitive advantage

When making an investment, one of the first things that I look for in a company is a competitive advantage.

A factor or a characteristic that tips the economic odds in the company’s favour. Something that makes the probability of success much greater than 50%.

A company needs something that helps it win in the market.

One of the big mistakes that many people make is forgetting that they are almost always in competition.  You are in competition in business, in your love life and in your commitment to your health.

If you are to win in the game of life, you must be better than the competition.  

You must find a way to outcompete them.

Your competition – whether it is another business, another guy that is flirting with a girl you like or another player on the pitch – they are all playing the same game as you.  They are also trying to win.

Whatever you find easy, assume that they also find it easy.

In a 90 minute football (soccer) game, the real game starts 70 minutes in.

70 minutes is when the competition starts to get tired.  If you can continue pushing past 70 minutes, this is when you can start to tip the odds in your favour.  

The amount of effort that you put in after 70 minutes is your competitive advantage.

This is how you win.

Embrace and enjoy the pain

You should welcome the pain.

The pain that arrives when you have been working for 12 hours already.  When you have been running for 70 minutes already.  When you have been shot down 3 times already.

It is the desire to give up.  To quit.  To surrender.

When the pain arrives, you should rejoice.  You are now in the “making a difference” territory.

The pain signals not the beginning of the end, but the end of the beginning.

The work starts now.

As does the learning.  As does the growth.

For those who ask not for a lighter burden but for broader shoulders, the work you do after the pain starts is what helps you grow those shoulders.

This alone should be enough motivation to carry on.  But for those who want something more practical, here is what I suggest.

One Two weird tricks to help you dig deep

OK they are not so much weird tricks, as two separate concepts for the world of sport and the world of business that I have mashed together.

1. The Power10

There is a rowing term that I like called a “Power 10.”

When a rowing team is nearing the finish line or has fallen slightly behind, the cox (skipper of the rowing boat) will raise a call for a Power 10.

This means every rower on the boat puts in 10 extra hard strokes to finish off the race or to attempt to regain the lead.

Our minds are not good at putting in maximum effort constantly.  But it is much easier to put in maximum effort for a defined time.

A Power 10 can be applied to anything.

5 more miles running.  2 more A/B test on your ad campaigns. 3 more companies analysed for investment.  1 more approach to a new attractive woman.

Just give it full effort for a little extra time.

2. Contingent reward

This concept I have borrowed from my job as an investment banker.

For those who don’t know, as an investment banker, I help entrepreneurs sell their business.  I do other things but let’s stick with the sale example for now.

If the company sells, I get a percentage of the sale value of a company.

Say my fee is 1%. If I sell a company for $100m, I get $1m.  But if I work a bit harder, and find a way to sell it for $150m, I get $1.5m.

The harder I work and the better I do, the higher my reward is.  My incentives are fully aligned with the clients.

You can create this same structure in whatever you are doing.  

Whatever reward you want, whether it is slices of pizza, beers or even just an hour off with a favourite book, you can give yourself this reward, but based on the level of effort you put in.

The reward should be set on an increasing scale based on the additional effort you put in, after it becomes difficult.

An example

Let’s put these two together, and give an example.

Let’s say you are creating a new info product.  

You have been grafting away for 10 hours that day already.  You are tired. You want to give in and go and watch some Netflix.

You are at the point where most ordinary people would give up and congratulate themselves for the 10 hours worked that day.

But not you.  You know that the competition is dropping away.  You are in the red zone now.  The point of making a difference and getting ahead.

You call a Power10.  

Give me an extra 2,000 words tonight.  For every additional 500 words you write tonight, you earn a slice of Pizza on Saturday.

The combination when used with a reward that you actually want can work wonders.

The whole world works on incentive structures, but so often we don’t put any effort into thinking about how we incentivise ourselves.

You must create an incentive structure that allows you to push beyond the point where it hurts.  

Only when doing this, can you enjoy the reps that really count.

Let me know in the comments if you have any tips for digging deep and smashing through the pain.

Categories
Life Hacks

5 reasons to use writing for clearer thinking

“I don’t know what I think until I write it down”

Joan Didion

There are many benefits to writing, whether it is in a blog or in a diary.

Writing helps you process events and emotions in a healthy way.  It also improves your ability to communicate over time.

For me though, one of the most powerful benefits is that it forces you to articulate your thinking.

The quote above is attributed to Joan Didion, a journalist for Vogue in the 60s.  There are many other highly successful people, including Warren Buffett,  that attribute their wisdom to the act and process of writing.

Here then are 5 reasons that you too should consider writing more often and using it as a tool to improve your thinking.

1. Writing allows you to be truthful with yourself

“Integrity is telling myself the truth. And honesty is telling others the truth”

Spencer Johnson

On almost all major issues or questions, we have an initial gut instinct answer.

Sometimes, it is something that we have read somewhere else.  Sometimes, it is what we want to answer to be because of our own bias.  Sometimes, it is just the answer we land on because of the mood we are in at the time.

If we were asked to substantiate why we think what we do, we may well be able to come up with some reasons why.  Many of us are intelligent enough to think on our feet and bluff our way through.

The truth is, in this scenario, the reasoning many of us would give to support our view is more likely to be justification than rationale.

To avoid losing face and admitting we were wrong, there is a temptation to focus on outwitting the challenger with flawed justifications rather than truly seeking to understand the reasoning in our initial answer.

Writing allows us to outline, understand and develop our thinking whilst avoiding public scrutiny. It removes any external criticism and allows us to be completely truthful regarding your own arguments.

This is the easiest way to get to the core of what we truly think and why.

2. Using the writing process to challenge assumptions

“Your assumptions are your windows on the world. Scrub them off every once in a while, or the light won’t come in.”

Isaac Asimov

Until you record all of your thoughts on a page and map them out, there are likely to be dark spots.

These dark spots are areas you have not fully considered.

Writing allows you to illuminate these dark spots and the assumptions in them. 

Once illuminated you can test your assumptions properly. 

You can justify or tweak your assumptions and flow this through the rest of your argument.

Writing allows you to challenge your own thinking in the same way that an opponent may challenge you if you were debating them.

Only by going through this process will you understand what the assumptions are and what impact it has on the conclusions that you are drawing.

Challenging these assumptions leads to more robust thinking and conclusions.

3. Develop deeper thinking

Failing to consider second- and third-order consequences is the cause of a lot of painfully bad decisions

Ray Dalio

Good thinking involves looking at the second and third order consequences of action.  

For those not familiar with this term, every action causes a re-action. This would be the first order reaction.  The first order reaction will have its own impact, and this will cause a second order reaction – a “knock on” impact.  A third order reaction will also follow.

Properly developed thinking requires working through these second and third orders. 

This is easy to understand but very hard to do. 

Perhaps you can play mental chess and have the capacity to balance several different threads and layers of argument in your mind.  Good for you.

Unfortunately, holding lots of different information in my mind is too difficult for me.  Fortunately, writing things down allows me to develop the proper depth of thinking required.  

Writing down your line of thinking will allow you to record it. The thinking process can then start again, only this time it is on the second order effects. Rinse and repeat for the third order effects.

This is how you take your thinking to the next level; the second and third order level to be precise.

4. Re-structure your thoughts to be clearer

The only kind of writing is rewriting

Ernst Hemingway

By writing your thoughts down on page, you are given a chance that you would not be afforded if you had to give your thoughts on the spot.

You are given thinking and preparation time. The time to turn the muddled mess of half formed thoughts into a single coherent argument.

Let me tell you about the process of writing and thinking;

Write down thoughts.  Re-draft writing of thoughts.  Delete big sections of thinking that is invalid.  Revise big sections due to in-complete thinking.  Re-order points to be more logical.  Review and edit language.  Review once more.

Only then are you done.

This is the process of developing a proper line of thinking.

It is constantly revising and critically challenging your own work. A big piece of this is re-structuring the thoughts such that it allows a logical, rational and consistent argument to develop.

5. Keep a record

Writing down your thinking and outlining why you have made a decision is an extremely useful record to have.

It is always smart to revisit your thinking process. As time progresses, there are two scenarios you may come up against:

The first scenario is one where the eventual outcome from your thinking and decision will be known.

Imagine you form a line of thinking that Apple stock will increase in price due to a certain factor.  In 12 months you can look back and confirm what has happened to Apple stock. It is fact.

In this situation, you will be able to check the record of your thinking and determine whether your conclusions later turned into reality.  You can look back and mark your own homework. This is actually quite a fun exercise.

The second scenario is where you will never know what the right answer is / was. 

For example, there could be a political debate on a particular issue.  You will never know whether your opinion on a particular policy is right or wrong.

You can however look back after the fact, and determine whether you still believe and understand your line of thinking. 

Perhaps there is new information that has arisen in the course of events. Unless you are actually a politician, changing your mind based on new information or time elapsed is a completely healthy and natural thing.

You should revisit your line of thinking regularly to understand whether you still think the same thing.

General advice

Generally keeping a journal or a diary is a good thing to try.

It can be a very soothing experience. It can enrich your thinking and your ability to communicate.

Like many good things, it is also free and there are no downsides that I can see.

What do you think? Let me know your thoughts on using writing as a hack for better thinking.

Categories
Life

30 life lessons now I’m 30

I’m clearly not the first person to do this, but I just couldn’t help myself.

Here are the 30 things that I have learned from my first 30 years on the planet. These are probably most relevant to the young guns in their early and mid 20s.

This is my list:

1. You never know as much as you think

At 18 I thought “I know everything. Everyone else is an idiot.” At 21, I thought, “No, now I know everything.” At 25, I thought, “Boy, was I wrong at 21. Because, actually it’s only now that I know everything.”

At 30, I now feel like “Christ, I still don’t have a fucking clue.”

I do, of course, have a fucking clue. But as your knowledge expands, the amount that you realise you don’t know expands at 10x the rate.

You have not properly matured until you realise that the amount you don’t know eclipses what you do know.

2. Start early on your network

The majority of game changing business and personal opportunities will come from your personal and professional network.

Your network is an incredible asset that no one else can copy. You will have a unique set of connections and can build unique levels of trust with the key people.

Keep in touch with as many people as you can. Connect as many people as you can. Keep doing it and never give up.

3. There are plenty of idiots in high positions

I have been fortunate enough in my line of business to spend time with quite a few C-suite executives and have attended / presented at several board meetings.

You would be amazed at how many C-suite executives are not overly competent.

Just because someone makes it up to the top, doesn’t mean that they are the smartest person in the room. Many times it is the opposite.

Almost all of them heavily lean on their “number 2” that does almost all of the leg work.

4. Intelligence is not the key predictor of success

Intelligence and being smart is very important. You wont get far without it. But in today’s competitive world, it is kind of a given.

Social skills and dealing with people is the most important skill set needed for massive success.

From day 1 in a business you need to be able to deal with people and sell them on you and your business.

Before you are 10 years into a proper career working for someone else if that is the route you choose, you will find yourself under pressure to start generating new business or revenue for the firm.

Quite quickly, everything become sales, and you need to be able to deal with people to sell.

5. It gets harder to keep up with technology

When you are in your early 20’s, you adapt to new technology with ease. But as you get older, you would not believe how easily you can fall behind.

When you are young, you typically you do not have much invested in old technologies.

But once you have 5 years experience using a particularly type of software for example, it becomes harder to switch and learn from scratch, even if the new software is better.

You need to actively fight this impulse.

6. Destroy your ego as fast as you can

Many, many destructive behaviours can be traced back to your ego.

It is not always obvious, and you may use your ability to think on your feet to justify why you didn’t approach a girl or why now is not the time to start a business for example.

This is all just ego protection.

You need to move past this quickly and embrace rejection and failure.

7. Even your friends may not want you to win

Depending on who your friends are, they may not always have your best interests at heart.

They may intentionally or unintentionally sabotage you so that you do not succeed ahead of them.

You will learn over time how to cut these people out.

Give everyone the benefit of the doubt for now, but if you sense that someone isn’t happy to see you succeed, then you need to ruthlessly remove them from your life.

8. Raise your hand for the $5 note

Don’t be afraid to accept things that are offered to you.

If someone says raise your hand and I’ll give you $5, you should raise your hand as fast as you can.

Perhaps this wont affect everyone, but I suffered for a long time wanting to do and achieve everything myself.

This is admirable… but mis-guided.

Don’t be reliant on freebies or hand outs, but accept them when offered.

9. No one cares about you or thinks you are special

No one in the world, barring perhaps your parents and spouse, cares about you.

No one cares if you succeed or fall by the way side.

No one will take care of you.

No one will make sure that you have what you need.

Children have someone to look after them. Adult men do not.

You and you alone are responsible for yourself.

10. Your first attempt will fail

Whatever you do and whatever you try, unless you have an incredible gift, you will likely fail at the first try.

You may also fail at the next 100 tries.

This sounds obvious and of course it is. But its so easy to forget it when you are failing for the 52nd time and you are at the point of giving up.

You must keep going if its an important goal.

11. Social issues are a waste of time

Spending your time arguing or debating politics or social issues is a waste of your time.

Who cares whether gender is a social construct. Who cares if sexuality is fluid.

That is all just noise invented by people with little else to concern themselves with.

You will do yourself a favour to avoid these issues and focus on improving yourself and your station in life.

Be selfish and let others deal with this stuff.

12. The easy bit doesn’t count

Life is a competition. You are competing against the next guy that is trying to do the same thing as you.

All else being equal, if you find something easy, there is a good chance that someone else does as well.

Imagine you are in a rowing race. The first 950m are easy. The last 50m are hard.

Most people will row about 960m and give up. They will congratulate themselves for getting so far into the race.

This is wrong.

Anyone can row the first 950m. The race starts from 950m on wards.

That is the only bit that counts and you must adapt into this frame of thinking.

13. Approach and fuck as many woman as you can

When you are young, there is no reason not to approach and fuck as many woman as you can.

You need to get that out of your system.

I have seen guys settle down with the first girl that will go out with them. It gets pretty ugly when they are 5 years into the relationship and start looking at hookers out of desperation.

You must not dedicate your life to chasing women. This is not helpful to your bigger goals. Equally though, you must develop some game and experience with the opposite sex.

14. Understand whether you can try drugs

I don’t know what it is that separates the habitual addict from the casual user. But I do know it is extremely important to know which side of the line you are on.

If you are not confident that you can prevent yourself from getting addicted to substances, then you must not even try them once.

If you believe you can prevent them from taking over your life, then go ahead and feel free to use them up to once per quarter.

The minute it starts to affect your abilities to work on yourself and build your business, you should quit forever. Its literally that black and white.

15. Do not get anyone pregnant

You must not have any unplanned pregnancies.

Again, its obvious. But what is obvious now is very easy to forget when you are in the heat of the moment and find yourself one condom short.

Don’t be stupid.

Having a kid at a young age doesn’t completely screw your entire life. It just sets you back about 10 years and makes it 10x harder.

16. The game never stops

In almost every game, there is no end to the hustle.

Even when you business is established, you still need to be out selling and generating new business.

Even when you are ripped, you still need to keep working out.

Even when you are married, you still need to game your wife regularly.

There is no “set it and forget it” in life. Everything needs some level of constant work and attention.

17. Delegating is hard

When you start out in life, you are doing everything.

You are doing everything in your business. You are managing your entire personal life. You are managing your household.

As life progresses, you may start to get others to help out with your cause.

For many, their first taste of delegation will be employees (or most likely cheap outsourced labour on Fiverr or whatever.

You will learn quickly that no one does things to your standard. You will also learn how hard it is to properly explain what you want done.

You will be frustrated to no end when you first start delegating. Stick with it though and you will need this leverage as time goes on.

18. Research less and just do it

Smart young people often fall into the trap of researching the hell out of everything.

“I am smart therefore I can figure this out from research.”

Totally understandable but largely a waste of time.

You need to spend your time trying and not reading. Just start.

19. Focus on wealth creation, not wealth extraction

With a rabid desire to get rich that many young guns have, ethics can go out the window. All you care about is getting as much fast money for yourself as possible.

This is a mindset of extracting value from someone else instead of creating value for everyone.

This attitude is short term at best.

You need to focus on giving something valuable. Creating value takes longer but the rewards compound over time.

20. There are no secrets

There are generally very few secrets to anything nowadays.

There is no secret to “getting the girl”. There is no secret to getting a six pack. There is certainly no secret to getting rich.

You would do yourself a massive favour if you stop immediately should you still be looking for these secrets.

There is the odd “insider tip” but this adds on perhaps an extra 1% to your performance.

In today’s age, information is so widely distributed that if there truly were secrets, they would be so widely known such that they are now just called information.

Also, it goes without saying, no one will sell you the secrets in an ebook for $49.

21. Always be the first to say Hi

I always wondered how some people get chatting to people so easily. I wondered why don’t people speak to me as often.

It took a while to figure out that the most important factor that makes someone “social” is that they initiate conversations. Constantly.

Most people are waiting for the other person to open the conversation.

You should take the lead.

22. Don’t be afraid to voice your opinion

In school, when the teacher asks “does anyone know the answer” this is typically followed by a large silence.

The same thing happens in professional work places. The same thing happens at industry events when the speaker asks if there are questions. The same thing happens in almost every environment. Lots of people are afraid the be the first to speak up.

This moment of silence is a golden opportunity to be the one that speaks up first.

You should be that person.

23. Don’t be jealous of others

Some people’s lives look awesome.

They may have been born with great height and an incredible jawline. Some look like they have a huge group of friends. Some people have incredible ability to sell stuff.

It’s natural to feel a bit of jealousy.

But you have no idea what is going on in other peoples lives.

You are typically only jealous of one small piece without taking into account the rest of their lives.

You could conceivably be jealous of Warren Buffett’s business success but his personal life is “un-conventional” at best and certainly not one that many would want to emulate.

Always remember this.

24. Don’t get swept away by the hype

Some people have a tremendous hype around them.

The Elon Musks The Jeff Bezos’. The Warren Buffetts.

You know these names and you know how great they are. Without question, they are top tier world class individuals at what they do.

But all three of them have to get up in the morning and take a shit like everyone else.

Everyone is human at the end of the day.

Don’t let someones reputation turn them into a god. Treat everyone like they are a fellow human and avoid the star struck pandering.

25. Get started on developing skills on day 1

There is no time to waste when it comes to developing valuable skills for wealth creation.

Whether it is a bit of design work, coding or finance skills. It doesn’t matter.

You must get started on developing your skills and putting them into practice as soon as you can.

“I’ll just focus on college then I will start trying to create a side hustle” is not acceptable.

26. Start on your work ethic

Work ethic is something that is learned. There is no caveman gene that gives us work ethic.

Some people may learn work ethic early due to their life circumstances (growing up poor perhaps).

Some people only learn it after they get burned from slacking off.

Whatever you situation is, you need to develop a strong work ethic. It is important to have the ability to work from the moment you wake until the moment you lay your head down at night.

Working a low paid manual job will show you what work ethic really is. A job where you are physically exhausted by the time you finish.

I recommend doing this for a short period of time as a learning experience.

27. Don’t be a round peg in a square hole

There are bound to be things that are not from you.

You shouldn’t dedicate your life to investing if you are not wired to understand numbers.

Likewise, you shouldn’t dedicate your life to marketing if you hate creating new ideas.

You need to find what you are good at and what you are naturally drawn to.

If it is clear that you are not suited to what you are doing, change it.

The most important thing is that you find something you are good at and start excelling at it early on so you can get ahead of the pack.

28. Don’t be led by others for too long

Having a boss is fine. Most people need some kind of leader when they are learning the ropes.

It is fine also to have a boss as you get older.

But you must create a situation where you have a material amount of sovereignty in your day to day life. You must break free of constantly being dictated too by others.

This will allow you to develop and become your own leader in your chosen field.

Baring jobs such as the military, a man who takes orders all day slowly loses the ability to make decisions in other areas of his life.

29. Learn to cook and clean

Basic life skills.

Not glamorous at all. Ideally you will outsource these eventually.

But you must learn to take care of yourself.

A child needs someone to cook and clean for them. A man doesn’t.

30. Don’t be too hard on yourself

When you are young gun, grinding your way to the top of your own mountain, it can be tough to see how far you have come.

You are constantly looking forward. You are constantly chasing the levels of success that others around you appear to have.

You can easily start to beat on yourself for not having made it already.

Don’t be too hard on yourself.

Stay the course. Your time will come.

What do you think about these lessons? Agree or disagree?

Categories
Investing

Why Young Guns should invest in growth stocks

By now it is well acknowledged that most passive investors in a sensible index beat active managers.  

From a medium term financial returns point of view, the rational move is to invest in a diversified index fund and accept your returns will approximate Beta (ie the market return).  Then sit back and let compounding do its work over a period of 20 – 30 years.

Simple.

Well, not quite.

There are a few factors that I think need to be considered and it might make sense for a young gun on the make to include a few growth stocks in their portfolio.  Here are the key points:

1. Growth stocks provide learning experience

I believe a young gun should invest in a basket of growth companies as this provides an additional learning experience and something else to track along your own journey.

Following growth companies helps build experience in an industry. 

If you invest in 5 innovative SAAS business you get a better feel for the industry via your investments.

It also provides an opportunity to see what moves the company makes.

Public growth companies tend to be some of the better businesses.  There is an element of survivorship bias built in – to get to the stage they are at requires them to be decent business. 

Watching how the business executes can provide very valuable lessons and tips for your own business efforts.

Investors can also see how the management team communicates with the market.  How they frame issues in discussions and calls with investors.  It gives the investor a feel for the industry movements.

Now, you could just follow companies, but I think the lessons are magnified when you have a financial interest in them and it keeps you focussed on a small number.

I would suggest that young investors pick a small basket of 5 or so growth companies in an industry that they like and invest in these companies.  

I would not suggest picking businesses like Facebook, Tesla, Google etc.  These are great businesses but they are all over the headlines.  The information published on them is generally very vanilla and often just media driven speculation.

A small basket of interesting fast growth micro-cap businesses will provide you with better perspective and learning.

Investing a small sum in these companies and following them over time (at least 3 years and ideally more) is key to getting value out of the strategy.  This means you should not touch the capital whilst following these companies (ie don’t sell unless it is clear that the business is in a terminal situation).

2. Beating the market is meaningless with low capital

The point of selecting these growth companies is not to beat the market. It is to learn.

Beating the market, or generating Alpha in finance speak, is great.  It is the ultimate goal of every active investor.

But is it worth bothering about for private investors?

Well the maths is pretty simple.

If you have $100k and the market returns 7%, you just made $7k.

But let’s say you spend 500 hours (c. 10 hours a week) over the course of the year selecting companies that you believe will out-perform. 

You do well and manage to return 14% – double the market return.  Congratulations – that is an outstanding result.

A lot of effort has gone into the stock selection and has resulted in a return of $14k.  A whole $7k more than would have made by putting your $100k in the market.

Spending all of that time to make $7k is not a good use of time.  It would equal a return of approximately $14 per hour.  Not worth it.

Graphic for those visual thinkers

What should you be focussed on then?

3. Spend your time growing your income

Now to be clear, whilst the article is focussed on investing in growth stocks, I don’t want to detract from what you should be spending the majority of your time on.

If you do not have a decent capital base (by which I mean $2m+), you need to spend as much time as possible growing your income and keeping your expenses low so you can grow your capital.

4. Once you have built your capital base

As a sneak peak on the future, lets talk about what to do once you have made it.

For old hand investors with a large amount of capital, passively investing in the index is also not always the right answer.  

The index is “safe” to a certain extent in that the yield that should be relatively consistent over time.  

Clearly there will be drops in the capital value (as we have just seen).  But the portfolio is diversified and consists of robust companies so should always do ok over time.

For investors with a decent capital base (lets say $5m or higher), a more preferable option may be to take a control position in an established niche business (probably a private company).  Acquiring a private business that dominates a small mission critical niche for example would potentially be a better option than passive index investing.

For most of the young guns reading this blog however, this will not be their situation so back to reality and what you should be doing now.

5. Portfolio

For Young Guns today, I wouldn’t advocate allocating more than 10 – 20% of your portfolio to these individual stocks.  It should be a set and follow strategy.

The remainder would be split between the index and dividend stocks to provide income.

This is differentiated advice.  I have not seen anyone else suggest that young guns adopt this strategy so clearly it is not something that is for everyone.

Let me know in the comments if you have any thoughts or any companies that you have invested in.

Categories
Investing

Why Crypto is for idiots

I started off writing this post with a view to explaining why all Crypto investors are idiots.  

As I was writing out my reasons, I started to question whether in fact, it was me that is the iodit.  When writing it out, I realised there were some flaws in my line of thinking.  

This is the power of using writing to articulate your thoughts.

I’ll let you read through my thought journey below, but as with everything, there is nuance to be found along the way to developing your own opinion.

——-

If you step into the world of Financial Twitter, it won’t take long before you come across a long list of Crypto “Investors”.

In late 2017 / early 2018, Bitcoin went on a ripping rally and ever since then, every man and his dog claims to be banking healthy profits from trading it.  Some people even claim to have made millions from it.  

Many have made so much in fact that they are now selling courses on how you too can make money from Crypto.  How generous.

These “investors” and the people who buy their courses are idiots.

Here is why.

1. Crypto is not for investment, it is for speculation

Crypto is not a productive asset.  You do not get anything from owning it.

If you own a farm, you get crops which you can sell.  If you own a bond, you get interest.  If you own a stock, you have the right to a share of the cash flow stream or production.  If you own real estate, you get rental income.

Crypto, like all currencies, does not produce anything.  You can own it for 10 years and you will never receive any value from it until the day you sell.

In order for the owner to get a return, the market value of the asset must increase over time.  This is called speculation.  You buy something speculating that the price will increase.

Whilst speculation is not really for me, there is absolutely nothing wrong with it.  Many smart people have made good money speculating.

But to be good at speculating, you must be able to develop and explain why you believe the price of an asset will go up.  Otherwise you are just gambling (like an idiot).

So smart crypto investors should have an opinion on why it is valued the way it is just now, and what will cause the market value of the asset to go up.

This leads to the second point.

2. Crypto can not be reliably valued

Using bitcoin as the most prevalent example of Crypto, 1 bitcoin as I type today is $11,625.

Neither I nor anyone else can tell you whether that price is reasonable or not.

As an asset with an actively traded market, a constantly updated price is available.  Like all markets, the price today is driven by supply and demand. 

The current supply and demand factors have settled on today’s price.

The basic premise that many investors use to justify investing in Crypto is that there is limited supply (unlike with traditional currencies where central banks can and most certainly do create more currency).

The limited supply combined with growing demand over time will drive the price up.

That actually somewhat makes sense to me.  

Crypto currencies are in their infancy and with growing adoption of the Crypto as a payment method, demand will increase over time.

In order for this scenario to play out,  Crypto needs to be adopted as a mainstream currency and therefore it needs to offer some kind of incentive /  benefit to the economy in order to get people to use it.

3. What is the value proposition to the average consumer?

I do not see the use case for the average consumer to switch to Crypto currency as a method of transferring value as it stands today.

My current bank does not charge me any transaction fees.  It does not charge me to hold an account with them.  It offers me many free ancillary services including fraud protection etc.  It does not currently pay any proper interest on my money (but then neither does Bitcoin) although that will change eventually when rates rise.  All of these could of course change.

I wouldn’t say I am delighted with my bank for making payments but I equally wouldn’t say there is a consistent pain point that needs to be addressed.

I can not see the catalyst that will cause me as a consumer to switch to using Crypto-currency as a means of daily payment currency.  I would also venture that the vast majority of consumers have no interest in using Bitcoin to pay for a new TV for example.

Why would they?

For this reason, consumer lead mass adoption of the currency for daily use seems im-probable to me.

4. Merchant-led adoption

One compelling argument that I have seen is that merchants may prefer customers to use Crypto for payment as it reduces their transaction fees. 

Merchant’s currently pay an small fee for the use of traditional payment networks (eg Visa, Mastercard etc)

One of the key benefits is that through the use of Blockchain, Crypto will “disintermediate” these networks. A fancy way of saying it cuts out the middleman (ie the network).

Without this middleman party taking a cut, there are reduced transaction costs for the merchant.

If the merchant was to pass these savings to consumers, giving consumers a reason to pay by Crypto, this could potentially be a game changer.  There is now an economic incentive for consumers to use Crypto as a currency.

At the moment, I have not seen any merchants doing this.  

For the small but admittedly growing number of merchants accepting crypto, the price is still pegged at a traditional currency (eg USD) value and crypto (usually Bitcoin) offered as an alternative payment solution.

Even though some merchants accept bitcoin, most have what I would call a “soft offering.” 

They don’t use it to price goods.  It’s merely as a method for transferring value. The merchant typically immediately sells the Crypto for traditional currency.

As an aside, this does not materially change the supply and demand balance. There is demand for bitcoin immediately prior to the transaction from the consumer to buy the crypto. This is pretty much immediately offset by supply from the merchant just after the transaction as they look to liquidate it into a traditional currency.

The reason the dynamics currently work like this is because Crypto and most famously bitcoin is too volatile, which leads me to the final point.

5. Is Crypto a currency or a commodity purely for speculation?

The volatility of Crypto is notorious.

The wild swings in Crypto make it unsuitable to being a currency. A currency needs to be stable to allow people to transfer an agreed level of value in a transaction.

Some businesses and institutions find even traditional currencies too volatile and will look to hedge exposure over relatively short time periods (days and weeks).  Compared to this, Crypto massively fails as a currency.

We know that the driver of volatility is driven by large swings in supply and demand.  We can’t know for sure, but the probability is that these large swings come from speculators trading the currency.

The flows of capital from speculation currently drive the price up and down in swings of 5+%.  Great for traders.  Bad for businesses that want to use crypto as a currency.

Until the volatility is addressed Crypto can not be used as a currency.  As a result, the sustained increase in demand from new parties using crypto to transact will not arrive.

It is ironic to me that speculators piling in and selling out of crypto are driving the fluctuations in value that prevent crypto from being taken seriously as a real currency.  And because it is not taken seriously as a currency, it undermines the long term value of the asset itself.

The speculators actions are harming the long term interests of those that want to invest in Crypto for the long haul.

So is Crypto for idiots or not?

If I had to bet today, I would bet on Crypto increasing in value over time.  But I don’t have to bet.  And that’s just my hunch. Its not a proper investment thesis.  It would be a gamble.

I can’t say with any degree of certainty that Crypto will generally increase in value.  I can’t say why it would increase.  I can’t predict supply and demand.  And I can’t value it.  For these reason, I can’t invest in it and I don’t understand how anyone can.

The catalyst I can see that would make crypto a good investment is if there becomes an economic reason for consumers to start using Crypto as payment method for daily transactions.  This could be led by merchants offering some form of discount for payment via Crypto vs traditional currency (ie passing on the transaction cost savings to customers).  It could be driven by something else. I have no idea.

Regardless, for the long term value of crypto to go up, it needs to be adopted as a proper currency.

So what is my conclusion?

Well I have come full circle to where I started.  

How many investors today have a well thought out rationale for why Crypto is a good investment?  Not many.  “Crypto is the future bro” is not a reason to invest in something.  

These people are idiots.

They are buying with no sound reason why. The whole game is set up to take advantage of them. They are the greater fools.

Longer term speculators making probabilistic bets on the future use cases of Crypto are another story.   They could be geniuses and have it all mapped out.  Or they could be idiots.  Many are certainly smarter than me but time will tell if crypto is a good investment for them.

What are your thoughts?  Can you provide a reasonable argument for why Crypto makes a good investment?