Here we are for another installment in my ongoing series on how to rise, phoenix-like from the ashes of the Cryptopocalypse. So far we’ve looked at the lay of the land, talked about risk and ROI targets, and what a smart, good balanced portfolio should look like.
Today I want to talk about you.
You don’t know what you don’t know and I don’t know either
Everyone is an expert at something. It can be muscle cars of the ‘60s, or Generally Accepted Accounting Practices, or background Star Wars characters. In those areas where our passion and knowledge meet, we think of ourselves as ‘in the know’
Guess what, even in the area where you are sure you have it on lockdown, what you actually know is much less than what you think you know.
Putting it another way, none of us is as smart as we think we is.
Circle of Life
This is called the circle of competence. Knowing about it and avoiding it’s pitfalls is essential to making good investment decisions. It’s considered a core principle of investment philosophy by folks like Warren Buffett.
Starting out you do your research, look over the data, calculate ROI, projected growth, scour news sites, filings and finally pull the trigger and invest.
five years later you have made some nice cash and freidns and family start asking you abotu how they can invest too. It feels really good. You must be really smart. Maybe you can lighten up on the research, you’ve gotten pretty sharp at ‘feeling’ out winners.
Bang. you’re toast. We see this a lot with big institutional investors and funds. With all the money they play with, a reasonable conservative portfolio can make eye-popping amount of money, feeding the egos of the managers – who believe their own hype about being financial wizards.
Then it all comes crashing down because the golden gut doesn’t exist. There’s no replacement for solid careful research.
Avoiding being caught in the circle of incompetence
Always bear in mind you can learn something new. Top flight scientists at the peak of their fields often say stuff like “Now I can finally see how much I don’t know.” That is a very good attitude to have.
It will become easier to do your research as you become more experienced. It will be tempting to skip steps, it may work out in the short term. In the long term, it’s the same as going to a casino. The odds in your favour drop every time you’re sure you ‘know’ something about the market.
Even with your current portfolio, when you review (ideally every six months) protect your investments by doing a flyby on everything you own, news, filings etc. Not just market movement.
I know this is all common sense to a lot of you, but it’s really easy to fall into this trap when you’re making money – if the cash is rolling in, it must be because you’re smart…. right?
Sure, you were smart when you carefully researched and picked investments, that was the smart part. Picking based on gut feelings or superficial summaries and ‘tips’ not so smart.
Next time in Part V, we’ll get into the nitty gritty of how to pick actual cryptocoins for your portfolio.