Feeling jealous reading about someone who bought into Bitcoin early and got rich? “If only I’d bought!” you say, kicking yourself. But you didn’t buy.
Maybe you self-justify. After all, who are you to argue with investment titans like Warren Buffett and Jack Bogle, who don’t think Bitcoin is worth the computer chip it’s imprinted on. Plus, now that Bitcoin’s traded off a bit, maybe you feel a bit smug about being right in the long-run. Or at least this week.
Even so, a twinge of regret remains.
So, how can you prepare for the next Bitcoin? Here are some strategies for the next time — and there will be a next time — an investment opportunity like Bitcoin comes around.
Assess. Before doing anything, assess your ability to take on that kind of risk. Answer this: “If I allocate a portion of my portfolio to high-risk speculative investments, what will the impact be on my financial goals and objectives?” No vague answers allowed. If you can’t quantify your downside, you’re not ready to speculate. Establishing a specific amount is critical. Not only does this set your parameters, but also it can dampen a key emotion affecting all investors: the fear of losing money. You’ve quantified and accepted the risk.
Avoid Greed Goggles. People get emotional when investments look hot. They start self-selecting the information they want to hear; the "greed goggles" go on and the brain turns off. Only after losing money and feeling the full effects of their "greed hangover" do the goggles fall off and they ask themselves, “What was I thinking?”
Systematic Approach. Some mistakenly equate speculative investing with gambling. It is not. Successful investors who speculate take a systematic approach, a well-defined strategy.
Write It Down. To establish a strategy and a systematic approach to execute it, write down your rationale for each investment you are considering. Why? Spelling out an investment rationale in print is sobering. What sounded so good in your head may sound ridiculous on paper. Or, when spelled out, you may find it clarifies your thinking. Either way, you will have thought out and documented your strategy. It also stops you from being impulsive, which is for too easy today when a trade is one click away on your portable device.
Do Your Homework. As part of writing down the investment rational, you will likely find you need to do a lot more research. Research should define where the risks and the values lie as well as an expected timeline in which they are expected to occur. While traditional value investing analytic metrics don’t apply exactly (for example, a start-up may not have earnings and therefore no earnings-per-share ratio), that does not excuse you from doing your homework.
Stop and Smell the Tulips. If the investment seems like a speculative bubble, read up on how investment bubbles occur. The pattern of bubbles over time, from the “Dutch Tulip Bulb” craze in 1636 to now, is roughly similar because the psychology behind them doesn’t change much.
Discipline. Having a written investment strategy also imposes a discipline against making spur of the moment decisions when an unexpected event occurs—which in speculative investments inevitably happens. Going back to your initial rationale can curb you from acting emotionally out of fear or greed.
Review Your Game Tape. Your investment strategy becomes your "game-tape." After every investment, go back and review it. What made money and why? What lost money and why? Learning from your investment experience benefits you by being able to identify opportunities early and avoid making mistakes twice.
Diversify Your Risk. When taking on high risk, diversify. Venture capital firms putting seed capital in unproven start-ups diversify their portfolios. Learn from the experts. They know that of those initial investments, most will fail, some just breakeven — and one may turn out to be Google or PayPal, making up for the others.
Blow The Referee Whistle. When investing in high risk ventures, set firm buy and sell points. Setting quantifiable parameters, based on the research you did going into the investment, enforces critical investment discipline when you need it the most. It’s like a referee’s whistle telling you to revisit your investment thesis. Does it still hold up to reality? Or have things changed such that it might be time to sell and move on, regardless of whether the investment is up or down.
While not every investment will be profitable and there are no guarantees, by establishing your ability to assume speculative risk, having a clearly written and thought out investment strategy, doing the research homework and revisiting the plan, your likelihood of having a profitable outcome improves.
