Opinion of a professional risk manager. How I stopped worring and learned to love crypto

[Lamberth 1,009]

I started commenting on one of the posts this morning and picking words to express my thoughts made me realize that many people at the Forum are lacking basic understanding of investment strategies and/or risk management. Please bear in mind, this is just my view on things after working in the industry for many years. I am not trying to tell you how to live your life but I hope this could be useful to those feeling FOMO, anxiety or depression (especially during the bear cycles or what people perceive as bear cycles).

First of all, I’d like to make an obvious statement. “Investing is hard work. Sucessful investing is even harder”. When people think about this statement, they imagine a day trader - constantly following the market, making decisions all the time and triying to make a profit at every swing. All this is true (and there is a reason why many traders die young. One of my colleagues just died, he was 43). But actually investing long term is not a simple thing either. Some think “if only I had enough money, investing would have been easier for me, I would have had a buffer which I can lose so I’d have just lived my life without any worries keeping all my money in X (chose your option)”. Think again. Private banking and Hedge funds exists exactly because people don’t want to worry about their investment, it is easier to rely on professionals (despite the fact that many Hedge funds can’t beat the market and in most cases you’d be better off investing into an index). This is psycological. When you are rich, you always chose between time and money and time wins due to obvious reasons. In other words, rich people are not buying profits when investing in Hedge funds (even though they say they do), they are buying worry-free time. Luckily we are simple folks here and don’t have a luxury to do that. It means we can invest smart (we are investing our own money and do it for profits, right?) but have to pay the price. You need to think about your investment. Shall I buy more? Shall I sell?  How much? When? If only I had invested more last year. This is an endless cycle which could eat you alive.

The only thing I can suggest after working with risk management for quite some time - you have to stay rational and define your risk appetite before you buy anything. It is not a silver bullet, you still worry about your investment of course but it really helps. Your main task here is to limit your brain activity (yeah, I could have started talking about our brain and how it spends more energy than a body in certain situations but I’ll leave it to shrinks). Point being, it is really easy to be caught in the process and start gambling instead of investing to cover your losses (or to increase profits when greed takes over). This also happens in big trading firms more often than people might think. Google “rogue trader”. A man is weak.

The strategy I always recommend to my friends (in any asset class they are considering to invest):

1. Study the asset class. Understand what you are investing into AKA DYOR. Do not FOMO even if everybody says “buy now, this is the last opportunity”. It never is. Investing into fundamentals pays up so you need to understand the fundamentals.

2. Think about your time horizon. Do you need the money next year? In few years? Can you keep the money in the investment for 10 years if something does not go according to the plan, e.g. the fundamentals are still strong but it simply takes more time than you initially thought (think Amazon in 200x)? If you can’t sit on your investment long enough due to the time constraint - you are about to invest too much.

3. Define a percentage of your portfolio which you are willing to invest into the asset in question. This is the most important step. Think about potential risks/down-sides (in crypto it could be regulatory uncertanty, high volatility, hackers etc). Evaluate potential gains (sky is the limit, lambo, tech revolution, I am gonna be rich!). Compare with other asset classes you can invest into. Think equity, bonds, deposits, fx (in the long run fx volatility counts you know), investing into your local business, holidays you could have taken, investing into education, relationships. Keep some cash / money on your account. Never go all-in, diversify. This is not a poker tournament. Besides, it is hard to stay in the investment long term knowing that this is “your only chance”, it will drive you nuts. My personal “top investment of the last week” was a bunch of board games I bought for my daughter.

4. Define your exit strategy. What do you want from your investment? Getting filthy rich is nice of course but you need numbers. “I’ll sell 10% in 1 year” is a bad strategy, think “I’ll sell 10% after 50% increase”, “I’ll take out my initial investment after it doubles”, “I’ll keep 30% while fundamentals are strong and sell the rest in 5% chunks” etc. There are a lot of posts where people discuss the exit strategy and I don’t have any advice for you except - “define the exit strategy before you invest”.

5. Define your entry strategy. Hint - it depends on volatility. Never buy in bulk if the volatility is high and you can buy in chunks. DCA over time (buy every day, every week, every month according the volatility and your strategy). Buy in chunks until you reach the percentage you defined.

6. Rebalancing your portfolio. The percentage between different assets changes due to market conditions. Your investment moons and you might consider to rebalance. You are not “selling crypto for USD just because you can spend USD anywhere in the world”, you are moving your money from one asset class to another to reduce the exposure. In other words, you are starting a new investment cycle and need to consider all the above. Some say “I am going to buy until XRP is $1 with every salary”. Well, you might do that if this is in line with your strategy but consider this - your salary is not something you get for free (even though some think so). Even if you are not working your ass out, you are still investing the most valuable asset - time. You have just received a positive cash flow (salary) and need to consider how to invest it. It is not different from getting the money from other sources of income (even crypto). You are just rebalancing your portfolio and buying crypto for cash.

As I said, you could view the above from a different perspective (there are no rights and wrongs here), the most important message is this - do not act under a moment. Think before you act, develop a strategy and then re-think the strategy when situation changes going through the same stages as you did initially. Do not jump. You need a method. I just briefly explained mine but you might find another one which works better for you.

And the very last. Some at the Forum are waiting for crypto to change their lives and talking about “now” and “after”. Don’t. Start living now. Think about your holdings as any other investment. Take profits when you reached your targets (which could differ for all of us because we had different entry points, different initial investments and different expectations). Play a long game, life is a game of chess, not checkers.

Edited May 31, 2018 by Lamberth
Numbers

[jtusa 95]

6 hours ago, Lamberth said:

And the very last. Some at the Forum are waiting for crypto to change their lives and talking about “now” and “after”. Don’t. Start living now. Think about your holdings as any other investment. Take profits when you reached your targets (which could differ for all of us because we had different entry points, different initial investments and different expectations). Play a long game, life is a game of chess, not checkers.

https://www.reddit.com/r/financialindependence/comments/58j8pc/build_the_life_you_want_then_save_for_it/

[Lamberth 1,009]

5 hours ago, jtusa said:

https://www.reddit.com/r/financialindependence/comments/58j8pc/build_the_life_you_want_then_save_for_it/

Great post, thank you!

It is sad to read that a young man made early retirement his main goal in life. I wonder why anybody would do that. Your 40s - ok, fine, could be a mid-life crysis but early 20s? I can’t comprehend.

[Tayto 56]

Nice post.

On a side note: That film with Nick Leeson and Bearings was a mad one, he moved to West Ireland after that.

**** that kind of pressure, I only put in what I know I wont cry about if I lose, that it's my money and responsibility. ?

[Tayto 56]

double post

Edited June 1, 2018 by Tayto
double post

[Guest]

20 hours ago, Lamberth said:

My personal “top investment of the last week” was a bunch of board games I bought for my daughter.

My "top investment" recently was an Atari 2600 Woody. It has provenance with a sticker dating it to 5 March 1981. Unfortunately my personality profile is "all in" and i've ended up with 5 2600 consoles in as many weeks

[Lamberth 1,009]

3 hours ago, Tayto said:

Nice post.

On a side note: That film with Nick Leeson and Bearings was a mad one, he moved to West Ireland after that.

**** that kind of pressure, I only put in what I know I wont cry about if I lose, that it's my money and responsibility. ?

And what does he do in Ireland? Memoirs?

[Tayto 56]

45 minutes ago, Lamberth said:

And what does he do in Ireland? Memoirs?

Managed a football team in West Ireland for a while.. but now is a speaker on risk management around the UK or wherever ?

Here ya go http://www.nickleeson.com/biography/ ???

 

Edited June 1, 2018 by Tayto