Why do investors like playing games with their investments?
What do I mean? What I mean is that most investors treat their investments like a game instead of as a productive machine for building wealth. What kind of games do investors like to play? There’s the Greater Fool Game, Hot Potato, and Russian Roulette.
No matter what you call the game, someone eventually gets caught holding the bag, but the real-life consequences are slightly different. Instead of one person losing on the playground, it’s the other way around, where only the few who get in early profit while those who come in later lose.
When investing, most investors speculate instead of taking a more principled approach to growing their money. They would rather rely on timing and roll the dice in hopes that a greater fool down the road will pay more for a stock or asset than the price they got in on. It’s a lot like a Ponzi scheme, and much like a Ponzi scheme, the eventual victims don’t know they’re in a Ponzi until it’s too late. Think of the hundreds of investors – including celebrities and well-known public figures – who lost billions with Bernie Madoff. When asked why they invested with Madoff, many victims sang the same tune – saying it seemed like a “can’t lose” opportunity at the time.
Crypto exchanges are the latest breeding ground for Ponzi-like pump-and-dump schemes. Because crypto is unregulated, anything and everything goes. Behind the veil of purported blockchain security, nefarious crypto creators can create a new currency overnight and, with the help of social media influencers, hype up the new currency and shut everything down once they’ve gotten rich. The late adopters lose their shirts, and the masterminds ride off into the sunset with a fortune.
Most people know cryptocurrencies have no intrinsic value. They have no value in and of themselves. They’re worthless as a currency because no reputable merchants accept them as a medium of exchange because of their wildly fluctuating prices. The value of crypto is determined entirely by what investors are willing to pay for it on the open market.
Crypto’s uselessness doesn’t stop investors from trading crypto in large volumes. That’s because investing is just a game for investors. It’s like gambling. Everyone’s on the hunt for a big payout, but we all know the house always wins, and most who play the game go home losers.
As long as investors seek the thrills of speculating, Wall Street will always thrive, there will always be Ponzi schemes, and there will always be the buying and selling of worthless assets. As long as a crowd can get stirred up in a frenzy with the hype of a “can’t lose” asset, investors will always jump on the latest hype train and pump a bubble until it bursts.
Smart investors don’t gamble with their investments.
They don’t get caught up in hype and emotions like the average investor. Successful decision makers stick to principles when investing. Instead of going with their emotions, they go with their gut and with their heads to evaluate the probability of success of an investment.
Smart investors don’t fall for Ponzi schemes because they ask hard questions and invest based on principles, not emotions.
What are some of the main principles these sophisticated investors live by?
Invest for capital growth, preservation, and tax benefits…
These are the foundational principles for building wealth. Smart investors seek the three pillars of cash flow, appreciation, and tax benefits to build and preserve wealth. These triple elements are the special ingredients for compounding wealth through two sources of returns (cash flow and appreciation) instead of a single source from speculative investments (appreciation).
Think…
Investors invest with their brains. They rely on facts, figures, data, math, and metrics. They eliminate chance as much as they can to mitigate risk and maximize the probability of success.
Don’t chase shiny objects…
Smart investors don’t chase “the next big thing.” They prefer tried and true and what has already been proven. The next big thing usually doesn’t have a history of success or reference points indicating the likelihood of success, so it makes it difficult for savvy investors to analyze the probability of success. However, tried and true investments that have a history of performance and worth make it easier to project returns and plan wealth. That’s why wealthy investors gravitate to assets that lend themselves to modeling and projecting, which allows for proper wealth planning.
They think long-term…
Illiquid assets held for the long term are typically boring, aren’t as sexy, and don’t offer the kind of immediate payoff speculative investors seek. Still, they perform long-term and offer above-market risk-adjusted returns. Smart investors are comfortable in their investing skin and never suffer from the fear of missing out (FOMO). They gravitate towards long-term investments in assets with a track record of success. These assets are likely to continue that record of success and performance.
They don’t care what others think…
Most investors don’t care what the crowd is into. They judge investments based on principles and not on what others think.
Do you play games with your investments or stick to principles?
Avoid the next Ponzi scheme by sticking to solid investment principles.
