by Baruch Labinsky
Technological advances have made our lives simultaneously easier and more complicated. And what is true for all aspects of our daily lives, is equally true regarding investment opportunities.
It is very easy to access information about investment options, and we are bombarded by stories of private investors who have made fortunes almost overnight via their investments. However, the ease with which we can find the information hides the tremendous amount of complexity that surrounds many types of investments. There are almost endless options regarding how to invest, where to invest, which currencies, asset classes and structures, to list just a few options. And those investments can be via a huge investment house in another continent, an anonymous solicitation online, or via your next-door neighbor who has a great investment opportunity … and almost everything along the spectrum of the vastly different options.
Only invest in things you understand
One of the most crucial rules to remember when getting caught up in the hype and excitement of investing, regardless of the level of your general investing experience is only invest in things you understand.
If you have the time and ability, you can dedicate yourself to learning about an investment until you are confident that you understand it sufficiently and feel comfortable investing in that area. However, always remember that you are competing against thousands and possibly millions of investors, some of whom are professional managers or have inside information not available to you, and are spending tremendous amounts of money, time and effort choosing those same investments. With publicly traded securities, every time you make the decision to buy or sell something someone else is taking the other half of that trade or betting against you. Don’t underestimate this point! Deals that are “too good to miss” or investments which “can’t lose” are often exactly just the opposite. Educate yourself before you invest so that you can increase the chances of being successful (but never think it’s a recipe for guaranteed wealth).
You may have an area of expertise that you can take advantage of when investing. If you are involved in hi-tech you may feel you know which companies and fields it may well be worth investing in. The same applies to real estate, or any other area you are familiar with. The more you know about a specific field the more you can control your downside risk.
If you can’t manage to achieve the level of confidence necessary to invest yourself, you can decide either to avoid that area because you don’t understand it, or find a professional whom you trust enough, and who can invest in that area for you.
People ask me all the time about cryptocurrencies – what do I think about them? Should they invest in them or whether I can invest in them on their behalf. My response until now has always been that I’m not an expert in that field and don’t feel comfortable including it in people’s portfolios at my discretion. Why? Because of the rule I quoted above – only invest in things you understand. This point is doubly important when you are investing in speculative investments like cryptocurrencies where value is largely determined by someone else needing to buy it at a higher price than you paid. These types of speculative investments include many other assets like antiques and NFTs to name just a few.
Since speculative assets are not fundamentally a productive asset class (unlike a stock which is based on a business which generates profits) it is very difficult to acquire sufficient knowledge in order to invest in a manner that I would not consider pure speculation. The complexity of cryptocurrencies is something that should not be underestimated. Although there are companies that are producing blockchain technology that can be used in productive functions, the underlying asset class itself – the bitcoins, the Ethereum, Solana and all other cryptocurrencies do not have an objective value as they are not producing anything.
Cryptocurrencies are bought and sold based on the expectation that someone else is going to buy them when they are more expensive, and not because fundamentally they have an objective value because they are producing a product with a projected cash flow, dividends, and profitability. These facts make them far more speculative, and thus can’t be compared to a more fundamental income producing asset like real estate. One could argue that no asset, including real estate and stocks have an objective price as prices are set by the price demands of the marketplace. This logic is correct, but these assets are nevertheless more objective than underlying speculative assets like cryptocurrencies.
It is easy to see the appeal of these assets. The mystery and hype, combined with the stories of many investors who made small (and large) fortunes almost overnight from these assets are enticing. However, it’s critical to remember that investors in these assets also lost small (and large) fortunes just as quickly.
Regardless of whether you choose to invest some of your investment money in speculative assets like cryptocurrencies or in artwork, ensure that you don’t lose sight of the critical rule – only invest in things you understand. Caveat emptor or in our situation investor beware. But experts have a better chance of achieving their long-term goals and successfully investing for their future so education is the key.