Nov 24, 2022
How Much Risk Can You Stand?
Our Choices Determine How Much We Make Or Lose As Investors
The collapse of the FTX crypto exchange has directed more attention to the more general collapse over the past year in the prices of Bitcoin and other cryptocurrencies. We have never been an advocate of crypto and wrote of our concerns years ago. Quite simply, we have difficulty taking a position in something that has zero inherent value. The enthusiasm for crypto could be called the 21st-century version of the tulip bulb mania of the 17th century. Except, you can plant tulip bulbs and get beautiful flowers.
Crypto has no value at all. Typical of previous market manias throughout history, some ostensibly intelligent people, who should know better, have been swept up by crypto. The prospect of quick and easy riches blinds participants to the risks they are assuming. As the number of people prepared to assume the risks of owning cryptocurrencies continues to diminish, we expect that prices will continue to slide.
The risks represented by cryptocurrencies are but one of a host of current concerns. Aggressive central bank policies designed to quell inflationary pressures are being applied to a debt-laden global economy distorted by an era of historically low-interest rates. Geopolitical risk is at its highest level since the Second World War. We may wish to be done with the COVID pandemic, but the rapidly evolving virus may not be done with us.
This litany of risk should serve to have us reflect on our own attitudes, and whether our investment positions realistically reflects the investment landscape and our own psychological risk profile. One thing I learned as a money manager is that everyone is more risk-averse than they say they are. Whatever the rhetoric, people are more concerned about saving a dollar than making a dollar, which is a perfectly logical attitude.
We think it is a worthwhile exercise for everyone to imagine the amount of investment risk they’re comfortable with and reduce it by 25% or more to get to a realistic level. Doing so will reduce stress and emotional turmoil and allow us to be better investors.
We remind readers yet again, that however gloomy the financial landscape might currently be, the bear market will eventually end to be replaced by a bull market with a new group of leaders that will offer very attractive risk/reward opportunities. Some potential new leaders are already becoming apparent and are being added to our watch list at the Global Investment Letter.
Each month in the Global Investment Letter I update my investing activities, as well as comment on major global equity, fixed income, currency, and commodity markets.
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