Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas. – Paul Samuelson
So… the price of crypto is at a high again and it’s all over the news. I wasn’t really going to talk about it – I haven’t written about investing for a while but I should probably make a comment just so it’s in writing when I wonder what I thought at the time.
The reason I haven’t written about investing is that there isn’t much to write. The answer is to buy the S&P500 and get on with your day job. But I read Howard Mark’s latest memo (pdf link) and it is a good summary of the state of play for investors these days. If you don’t want to read all eighteen pages the TL;DR version goes like this.
Once upon a time investors had to work hard to get information about company performance so if you looked in the odd corner you’d find something cheap that everyone had overlooked. So you bought it at a low price and sold it when others realized its value and the price went up. More people started to get interested and it became easier to just buy good companies with great long-term prospects and hold them. The post-war years were boom years and big companies grew and grew as markets around the world opened up and as long as you held on to stock you could make money. Then the Internet came along and, after a false start, changed everything. Having an information advantage evaporated entirely with ubiquitous and free market data. Now, anything that can make more money out of providing a product or service than its cost of capital is worth an infinite amount of money. As long as it survives… So all you have to do is consistently pick winners. Or buy an index tracker and own the whole market. Your choice.
Back in 2018 when Bitcoin fever was kicking off I wrote a couple of pieces about building a trading system and buying crypto. Over a short period I bought into the market, saw it fall and sold at my stop-loss. I left my money in cash mostly because I didn’t know how to get it out and then reinvested it some time later. We’ll come back to that in a bit.
Mark’s memo is notable because it’s almost a conversation between him and his son, a distinction between an older generation and a new one. Marks plays the elder and talks about portfolio management, why the price you buy at matters and why you should take some money off the table when the price goes up. Things are different, the son argues. I’m going to buy something I believe in and hold it forever. And I’ll buy things that look expensive because they’re worth it.
But here’s the thing. The approaches don’t sound that different. Basically, set out your case and buy it if you believe. We’ll know in time if things work out for you. The chances are that you’ll go for the big companies, the ones that have made it. Or maybe you get lucky and pick that one company that goes on to dominate. But that’s not easy either. You’re looking for value, however you define it.
Anyway, back to crypto.
Let’s look at the bitcoin chart, updated from the heady days of 2018.
In case you’re not familiar with this chart it’s a Point and Figure chart, the X’s are increases and the O’s are decreases. And if you can read this chart you can go in and out of trades when you see certain signals.
What the price history is telling you is that the price went down and up for a while, mostly down, and then shot up quite recently – which is when it made the news again. A pattern not dissimilar to what we saw in December / January 2018.
Would I have made money if I had traded this position? Well, my first reaction when I saw the chart was probably not, there were quite a few points where I might have bought and sold over the period. But I wasn’t sure what the returns would have been. Well, rather than theorize I modelled the position. Now, the way I’d have done it is by committing a fixed amount at the start. I’d have then traded in and out without adding any new capital – just seeing if I could increase my starting stake. If I had done that I think the positions would have ended up something like this.
If I had invested a thousand dollars back in 2018 and done the trades as in the table above I’d have made $27 in profit, a return of 2.7%, less than a percent a year.
That’s not a great return but it makes sense to me. A crypto currency is worth nothing other than the belief people have that it’s worth something. You could exchange it for a burger if someone would sell you one or you could exchange it for dollars. If it were used for burgers, the chances are that it would behave normally. But because you can exchange it for dollars the greater fool theory kicks in and everyone buys it hoping to find a greater fool who will pay more to take it from them and that drives the price up. Over time, however, that results in pretty random behaviour and when you try and trade it you make naff all because of that random quality of the thing.
But I didn’t trade the way I would have done. What I did was buy the S&P500 and a few other cheap index trackers and get on with the day job. Since 2018 the S&P500 has gone from somewhere around 2,600 to 3,800 – an increase of 46% or so. But you know what – my investment provider tells me that I’m doing a very bad job. My investment rating is zero, the report card says “could do better” and apparently the funds I have are not rated “high quality”. That the S&P500, the 500 most valuable companies in the US, are not high quality. Which should tell you something about investment research. High quality funds are the ones that make them the most money, not you.
Ok. Stop ranting. This is about crypto.
What I actually did with that tiny crypto position was reinvest it in 2019. I didn’t write about it but I really did invest it and to prove it here’s the portfolio chart.
This is an Ethereum position chart and the few wiggles in the front are when I bought and sold in 2018. Then I stayed in cash – which is the flat line – and then I bought again in March 2019 ish. And then I left it and forgot about it.
That position is up, at current prices, by 566%. Brilliant, right? I should have put more in, shouldn’t I? No… not really. It’s a tiny fraction of my portfolio and it should be a tiny fraction. If it grows, then great. If it doesn’t, I haven’t lost much. Although maybe if I get another low I’ll go in again.
I don’t understand the crypto market – no one really does. But I don’t understand the S&P500 either. The point is that you won’t get a return unless you own a tiny bit of the world and the world includes crypto and so you should get an exposure to them, either by owning a company or owning some directly. Just make some good choices about how much money to put in each pot, pay as little as possible in commission and things should work out ok.
We’ll go back to interesting topics (for me anyway) from the next post.