In the history of the financial markets, no one has ever invested in something with the thought, “Man, this is going to be so painful.”
We don’t always make money. Sometimes we even lose money when investing. You may have purchased Meta stock prior to its price being cut in half due to the company’s slowing revenue growth. You may have invested in Zoom during the height of Covid only to be disappointed by valuation compression. You may have paid $1.2M to get a JPEG image of a rock. Now you are selling plasma for rent. I personally lost $157,000 after investing in the Buy Now Pay Later company following its SPAC merger.
We all have stories about losing money. We all have stories about losing money.
You may have bought bitcoin as a hedge against inflation. You may have bought Katapult, a company that allows you to pay later and buy now, because you believed the valuation gap between it and its competitors would narrow (to be fair It was just not the direction I predicted. You may have invested in Lululemon thinking that yoga pants would revolutionize the women’s wardrobe.
Whatever. It doesn’t really matter what the thesis is. You buy something, because you believe something else will occur. You may or may make money if that thing happens.
In a moment, I will discuss what happens if we “may not” make money, but let’s first get some context.
I am only 25 so I don’t know what investing was like in 25, 50 or 75 years. I know that in this era of social networks, sensationalized TV, and gamification in the stock market, there is a tribalism in finance.
Tribalism is deeply ingrained in our nature as social beings, not so far removed from the hunter-gatherer days. Tribalism makes us support sports teams, practice different religions and align ourselves with political parties. We want to belong to a “group.”
Money was considered a personal matter before social media. You might have discussed your finances privately with your spouse or financial advisor. But you wouldn’t want to broadcast your bullishness about a stock in front of 100,000 strangers. In the age of Twitter, Discord, and TikTok you can broadcast your opinion and find others who agree with it. Finance became the new medium of tribalism.
People like to identify with their tribes. Tom Brady, Kevin O’Leary and the team Bitcoin all put laser eyes on their Twitter profile photos as they cheered for it to hit $100,000. Tesla investors publish their opinions on Twitter using the $TSLA hashtag. They also gather in Twitter Spaces where Elon discusses the status of Tesla. Social media was flooded with pictures of slimy apes as people who bought a cartoon image of a primate rather than pay a downpayment on a home wanted A subreddit named “AMC Stock”, where thousands of ‘investors,’ echo conspiracy theories, about the Illuminati and Citadel’s Ken Griffin using
If you look at that forum, you’ll find that I am not too far off.
The more the stock does well, the louder the tribes become. Twitter was awash with lasers when Bitcoin’s meteoric rise from $69,000 to $79,000 was underway. Tesla’s market cap surpassed $1T, and any criticism, like ” maybe it is unreasonable for a company to be valued at $1T?“, was met by a wave of backlash.
Miami nightclubs replaced the “Happy Birthday B*tch!” with “I like stock” or “Buy dip”. Those who invested in the hot assets were cool and those who did not could enjoy staying poor.
Jerome Powell then decided that interest rates should not remain at 0% for ever. When Treasury Bills pay 4% returns with no risk, suddenly the net present value (NPV) of future cash flows from Dogecoin does not look as appealing. The most speculative parts of the market fell into freefall.
Now we are in the “not earning money” part.
Over the last few years, I’ve seen a certain pattern on the financial markets:
If your net worth increased by 10, 20, or even 100 percent because you invested in a speculative investment, you then found other investors who were also rich, and you proudly announced to the world that you loved that asset, it would likely become a part of your identity.
When you identify yourself with a speculative investment, and it starts to look like a liability, then you have a choice.
Do You Sell to Preserve Your Capital, or Do You HODL To Preserve Your Identity?
The rational decision would be to sell your investment, keep your capital and look for another opportunity. Irrational investments seldom end in rational exits. You rationalize instead of being rational.
Tesla has cut their prices by $12,000! This is actually good news for the stock, as it means they can continue to undercut their competition and grow their market share.
Bitcoin was an inflation hedge. It merely increased in value before the inflation hit, because it predicted a rise in money supply. This is the 4th supercycle, and next time we will hit $100k.”
The price of AMC has been artificially suppressed.
Investors in these situations think: “We are still so early.”
You can then justify your investment by modifying your thesis in order to fit your biases, rather than sticking to the original thesis. You don’t want to admit that you are wrong.
You can do anything but lose part of your identity.
It’s important to keep in mind that investing has only one goal: creating wealth. It’s important to review your portfolio when your investment becomes a wealth destroyer. The more you identify yourself with your investment the harder it will be to break up. After all, emotional bonds can be difficult to break.
