An estimated 20 percent of Americans own any form of cryptocurrency, suggesting that it is unlikely that many readers of this column own any Bitcoin, Ethereum or Dogecoin. That’s great news, since those three supposed saviors of the U.S. economy have declined 60 percent this year, wiping out $1 trillion in investor capital.
But the collapse of the crypto market reminds me that if investors could just avoid a few basic and common mistakes, they could avoid a lot of unprofitable moves.
Never invest in something you can’t simply explain, ideally to a child. This one rule would prevent a lot of huge investment losses.
Don’t ascribe some level of competency to someone simply because of their media presence. CNBC regularly features so-called experts from huge investment firms who talk about crypto as a legitimate asset class that should be in every investor’s portfolio, like owning some stocks and bonds. Having a fancy title and being on television simply means that you are a good communicator and are available. Popularity does not confer competence.
Never confuse luck with talent. A rising tide lifts all ships, but as Warren Buffett eloquently reminds us, it’s only when the tide goes out that we learn who’s been swimming naked. A lot of people are swimming naked and don’t even know it. If 100 people organize a coin flipping contest, the eventual winner would have correctly predicted heads/tails six consecutive times. He would be silly to assume he had some special skill at calling a coin flip.
So is the person who has a feeling the stock market is about to go down and then sells all of his stocks immediately preceding a big drop. That’s luck. And if luck got you out of stocks, it’s going to take luck to get you back in at the right time.
Depending on luck as an investment strategy reveals an even more basic investment mistake: not having any strategy at all. If you don’t have a strategy, you are almost certainly (and probably unknowingly) bouncing from one strategy to another, likely just as a particular strategy has reached a cyclical peak in its popularity and effectiveness. That is, you generally sell low and buy high – which is a terrible strategy.
Without a strategy, how do you know how to react when one of your investments makes a huge price move? If one of your stocks doubles in price, do you take your gain or buy more? What if it falls by half? Do you take your loss or buy more at the lower price? If you don’t have a strategy, you might as well be flipping a coin.
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.