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Last year one of my investments returned 123%! Do I wish I had bought more? Nope. It wasn’t a good investment. The fact that it increased so dramatically in price isn’t an indication of a good investment. It was a pure gamble. A speculation. Therefore, I only bought what I was willing to throw away. It was completely for fun. Which is weird for me because I don’t gamble in the traditional sense. If Vegas relied on my money to stay afloat, it would have folded long ago.
But I used to gamble all the time with my investments. Mostly without realizing it. I didn’t understand the difference. As I have moved through life and accumulated more, the stakes have gotten higher and time to recover has gotten shorter. The consequences of gambling have suddenly become clear. I can’t afford not to differentiate.
When you are gambling, the odds are in the favor of the house. The only way to win is random luck. And luck never holds. Math always wins.
For me to call something an investment I have to know there is a likelihood of return of my original investment and a reasonable rate of return. It doesn’t have to be a slam dunk or a massive payoff. I just have to know that my winning isn’t random luck and even if I am wrong from some of the time, I won’t be so wrong that I will be wiped out in the process.
With my investment/gamble, none of this was true.
So what did I gamble on?
I hope you are rolling your eyes at me. I hope I have picked an example where you can easily see how difficult it would be to call this an investment.
Bitcoin is an idea and a system of exchange built on faith. It will only survive if there is faith in the system. I can’t go gather up my Bitcoins and bury them in the backyard. I can’t melt them down and make jewelry or use them to create anything physical. They don’t pay a dividend. There isn’t an underlying business generating profits.
How would I make money on this? If this system became widely accepted as currency, its value will increase. It would require a shift from using currencies controlled by governments and central banks to something that most people struggled to understand, let alone trust. More likely, I would only make money from The Greater Fool Theory.
So why did I gamble on it? Curiosity. Pure and simple. And following my curiosity is fun and exciting (a sure clue that I was gambling). And the Libertarian in me loved the concept even if, or maybe especially since, it was fighting against the world’s central banks; arguably some of the most powerful forces in the world. I wanted to poke the bear even if he would never feel it.
Now that Bitcoin rose 123% last year, suddenly it is being peddled as an investment. The mere fact that it increased in value dramatically makes some believe it’s a worthy investment. Most people think the key to investing is finding that one right product. It might be a hot stock or start up or maybe Bitcoin! A recent article in the Wall Street Journal about Bitcoin IRAs confirms my suspicion that people are viewing it as an investment.
It isn’t about making right guesses about which things might go up in price. But you wouldn’t know that listening to conventional thinking. Financial news, your investment advisor, your neighbor or your uncle all want to talk about that hot new thing that just shot up in price. Maybe that is the thing that will make you rich!
True investing is much more boring. It’s finding those things that will have an acceptable return and a reasonable expectation of returning your principle. It can be as exciting as watching the grass grow.
I don’t need the excitement. I’ll take boring any day of the week.. To me, not losing is just as important as winning.
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