Lessons in Hindsight, Aspirations and Risk
This past weekend I was listening to a podcast dedicated to the outdoors.
While it wasn’t particularly notable, what intrigued/surprised me was the first segment entitled: Has the Bitcoin boat sailed? The premise was a conversation between the hosts about a Bitcoin (BTC) investment that one of the hosts had made. What was clear from the discussion was that the investor had strong aspirations for the investment – buying a fishing boat– but clearly didn’t understand the risks and how he would manage them.
Too often, as investors, our aspirations for our investments (i.e.: what kind/how big a fishing boat can I buy) take precedence over a rational risk management strategy. Speaking from experience, many of us learn the hard way. For some, the lesson isn’t catastrophic, but for others, the losses have severe financial implications.
Too often, as investors, our aspirations for our investments… take precedence over a rational risk management strategy.
In 2000, when market exuberance was infectious, even I was caught up. Technology stocks were flying, and I invested in a company called Wavve Telecommunications. Wavve was building out networking facilities, basically server farms for e-commerce and voice networking services. The investment did fantastically – if memory serves me correctly, it went up seven-fold – and as my investment grew, I dreamed about paying down my mortgage on my new townhome, putting in some new hardwood floors, etc. I kept telling myself that if it goes up just a little more, I could afford to treat myself to a fancy stereo system that would blow my mind.
Well, needless to say, I didn’t get the fancy stereo system or the new hardwood floors. Wavve went to zero, and it remains on my brokerage statement as a constant reminder that investing is a risky business and that the goal is to ensure that no single or groups of investments cause us catastrophic harm to our long-term objectives. In my case, Wavve didn’t set me back too far financially. Overall, I managed to do well, and, by luck or circumstance, I had liquidated all my investments (except Wavve) and purchased my first home before the tech bubble ended.
Turning back to Bitcoin, today, as I write this, BTC’s price is $55,772.96, having gone up 123-fold over the last five years[1]. In hindsight, I know buying a good many Bitcoins would have made me wealthy. In hindsight, I also know that rather than selling my townhouse to fund our current home, hanging on to it would have significantly increased our household wealth (as my spouse is fond of constantly reminding me).
I’ve written extensively about this before: we often fail to distinguish foresight from hindsight, along with effort and skill from luck.
Five years ago, it was not clear that Bitcoin had the potential to rise exponentially. Nor was it clear in 2006 that Toronto home prices would continue to climb unabated and would make some people very wealthy. As an investor, it is critical to distinguish foresight from hindsight. I continue to exercise effort and apply skill in my work. But I also know that much of this success belongs to luck.
…we often fail to distinguish foresight from hindsight, along with effort and skill from luck.
We need to recognize that risk is the price we pay for a chance to reach our aspirations. Investors who buy Bitcoin are not seeking risk; they are seeking an opportunity to achieve their aspirations. They hope Bitcoin profits will lift them from living paycheck-to-paycheck to middle-class, from middle-class to upper-middle-class, or from upper-middle-class to wealthy. They hope Bitcoin profits will let them retire early or quit boring jobs to follow their passions or seek more satisfying careers and vocations.
…risk is the price we pay for a chance to reach our aspirations.
I empathize with Bitcoin investors because my aspirations, and likely yours, are no different from theirs. With my investment in Wavve Telecommunications, I was not thinking about risk. I was thinking about my aspirations for financial security (and a cool stereo system). Our aspirations extend beyond just financial riches. They are freedom from poverty, security for our family, health and freedom of vocation. We aspire for both upside potential and downside protection.
We would be wise to balance our aspirations for riches with our need for protection. There is nothing wrong with buying a few lottery tickets from time to time to satisfy our aspiration for riches. But it is not wise to sacrifice protection from poverty by making lottery tickets a primary investment strategy. There is also nothing wrong with buying Bitcoin to satisfy our aspiration for riches. But I don’t believe it is wise to sacrifice protection from poverty by making Bitcoin our primary investment or taking on risks beyond what we can meaningfully afford to do.
We would be wise to balance our aspirations for riches with our need for protection.
Moreover, the wise route to riches is not via lottery tickets or Bitcoin. It is via education, enterprise, and a prudent, patient investment approach that links today’s investment opportunities and risks to our ability to take on that level of risk. This approach can provide a slower path to more secure riches rather than fast, insecure riches.
Today, my concern is that investors have become complacent by taking on greater and greater risk to eke out marginally higher returns without considering the added risk in doing so. I don’t blame investors. Future potential returns for a “balanced portfolio” are projected to be 50% lower than in the past, and, as Jason Zweig of the Wall Street Journal recently wrote: “Bear markets haven’t gone extinct, they have evolved into teddy bears.”[2] At least that is what some investors believe. Who can blame them? Last year’s 34% loss in the S&P 500 was recouped in just 25 weeks[3]. Recoveries from previous highs have typically taken three years and often much longer. The last bear market was clearly not typical and, although we might want to believe that bear markets have been tamed, I do not believe so. We’ve been here many times before.
Whether you are considering an investment in Bitcoin, the next high flying stock, or just increasing your equity exposure to try and eke out some additional return, think not about your aspirational gains, but what could be your additional incremental loss and the potential effect that it would have on your financial circumstances. If that increased incremental risk is a risk that you can bear, then it may be one worth taking. If not, then be patient. The market will present opportunities in the future where the potential incremental return versus the risk will be more in your favour and you will likely be in a better financial position to take on that additional risk.
Until next time, stay safe and be well.
Corrado Tiralongo
Chief Investment Officer
Counsel Portfolio Services | IPC Private Wealth
Counsel Portfolio Services | IPC Private Wealth
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[1] Source: www.coindesk.com
[2] Source: Wall Street Journal: What Happens When Stocks Only Go Up; Jason Zweig, April 30, 2021.
[3] Source: Counsel Portfolio Services.
