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When the dotcom crash was in full fury an old broker said to me, “Well that’s it for the market for a generation. The private investors won’t be back until the next lot grow up and get money. This generation has been burnt and they won’t be back.”
Roughly a generation has passed. If you were nine years old in 2001 you’d now be 28 and perhaps with the wherewithal to start to itch to play the markets.
The broker was only half right, though. The next generation of investors are here, but they are not so interested in stocks--they are fascinated by crypto.
Some of the so-called Millennials will head for the stock market but the new legions are on the more than 500 crypto exchanges and learning the markets the hard way. My guess is that some are incredibly young and many are minors but one thing most have in common is a lack of experience that is palpable.
There are classic trading and investing mistakes and you can read about them as far back into history as you want to go.
Daniel Defoe, the author of Robinson Crusoe, wrote a pamphlet in 1719, “The Anatomy of Exchange Alley or, a system of stock jobbing. Proving that scandalous trade, as it is now carry'd on, to be knavish in its private practice, and treason in its publick.” Does the sentiment sound familiar? I have republished some books from the turn of the 19th century with a preface saying basically, “Do you notice the stock market is basically unchanged even after more than a 100 years of historical turmoil?” The scams and attitudes of the market and its participants are still so recognizable after over 100 years you are left to wonder if the billions spent on compliance on the worlds bourses are not a complete waste of money.
So it comes as no surprise that this new generation are exhibiting all the same traits and mistakes that sucked the previous generation of new investors and generations before them through the financial wood chipper. Now a funny event in the last few days made me think running over some classic errors of judgement for this new generation might have some benefit.
A couple of days ago I was blamed as a significant factor for the slump in bitcoin’s price. My perceived influence was placed ahead, at least in the format of the internet meme "5 reasons" list format, of CNBC, the Central Reserve Bank of Australia, Jack Ma, the FTC and a hedge fund bigwig.
That is as flattering as it is wrong. To think Warren Buffett can call bitcoin rubbish and the price goes up; Jamie Dimon can call it a scam and the price goes up; and when Bill Gates feels a need to go short, nothing much happens, but when I speak it’s a different matter.
Instead, it is an example of a classic investment error. The error: it is always a mistake personifying the market. So let that be number one in my “five newbie trading mistakes every crypto investor should avoid.”
1. Don’t personify the market.
The victims of the dotcom crash would talk about “the smart money,” this group doing that to another group to make money out of them. Narrative is a weak basis for investing. In crypto-times, people talk about whales as if there is a secret level to the game and secret methods available to those who are big enough to trade in great size, where they can’t lose, but you can. The whales won’t let the market do this, or do that, just in the same way as the smart money was dreamt to operate.
But markets are generally not political, they are predominately economic. It’s not about people, it’s about things and mechanisms.
You can beat a friend at tennis, you can beat other students in class, but you can’t beat the market. The market is not a competition and it is not a person. You can’t beat fund managers, you can’t beat the shorts, investing and trading is a game of Solitaire. Markets are inanimate; stocks, currencies, commodities and crypto are inanimate too.
I can’t make bitcoin crash with a few paragraphs. A market might twitch if a colossus of finance speaks but the price discovery of big markets, and crypto is a big market, needs massive interventions to sway them for more than moments.
Howling, expounding, hyping, none of this makes a difference to a market of any size. Markets are gigantic stochastic processes and it takes truly historic events to change or make the trends. If someone loses money investing there is no person to blame and that harsh reality needs to be embraced by anyone wishing to make money in the long term. Personifying the market warps the investor’s ability to understand the mechanism of buyers matching sellers and prices being made. “He said this, she said that” might make for tabloid journalism but it doesn’t make trends.
2. Don’t go all in.
Back in the dotcom era many people made millions piling risk on risk as the market boomed then bubbled. When the bubble burst they lost everything. You must always look to spread your risk even when or especially when things are going great. Keeping all your money on the table and piling it up on each play will in the end break your bank. A lot of investors in crypto are feeling that pain right now and the “HODL” (a bitcoin community term referring to holding a cryptocurrency rather than selling it) incantation will not make them whole anytime soon.
Investing isn’t poker or rather it should not be a gambling game. If you go all in with investing in an asset or two, you are almost certain to lose everything, it is just a law of probabilities. Diversify. Do not believe anyone who tells you otherwise, ever. Of course this new generation’s first instinct is to go all in and then when a correction or crash sets in, they lose everything. They then go away and never come back. It’s a never-ending cycle.
3. Treat investing like a game of skill not a game of chance.
Investing and especially trading, is a highly skilled task. You need the best equipment, execution and tools. When the market is only going up any fool can make money but that blessed state never lasts long and what is left is an environment requiring focus, skill and discipline. To succeed unlike the devastated cohorts of dotcom and the real estate bubble, you have to work hard at it.
The reader is likely the sort of person that reads up on investing but most people who enter markets do so without reading a book. They invest like the old pilots of early flight. They just get in the plane and take off and then figure out what to do next. That is not often going to end well. The legions of crypto traders and investors are simply not doing their homework in the same way as dotcom investors hadn’t got a clue about the technology they were investing in or about the market itself they were putting so much of their wealth into.
4. Say no to FOMO.
The dotcom boom, real estate in 2006 and now bitcoin: everyone wanted in because everyone was talking about the free money they were making. It’s a trap, don’t fall in it.
If you think you have to get into something to make money because everyone around you is making heaps of cash from it, prepare to lose your shirt. When it’s on the mainstream news and your neighbor is talking about it, it’s over.
What usually happens with FOMO (fear of missing out), is the victim jumps in when the bubble is at the hottest, a moment by definition when the market will be at its highest, they will buy, make good money for a couple of days or if they are lucky weeks, then fooop!… it’s gone.
If you read the media you’d think all popstars are zillionaires, all pro sports players and television presenters earn fortunes, and every model or DJ gets paid tens of thousands just to roll out of bed for a gig. So everyone wants a piece of it.
5. Don’t listen to anyone
A lot of people in the markets love tips. Ignore them, they will lead you astray. All information is incomplete, all trends can reverse at any time, don’t listen to tips, don’t take advice, don’t believe you are right, or that someone else knows anything. Instead, soak up every shred of information you can and filter it down and try to make sense of it. If it doesn’t make sense then leave that investment alone. Stock markets, commodity markets, crypto markets, they will all strip you bare if you let yourself be lead. If you are not ready to go it alone, then don’t go at all.
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Clem Chambers is the CEO of private investors Web siteADVFN.com and author of Be Rich, The Game in Wall Street and Trading Cryptocurrencies: A Beginner’s Guide.
