Why hello there! Welcome to the second “once a century” economic shock in this generation. If you’ve been looking at any financial publication in the recent past, you’ve more or less gotten confirmation of what the less popular economists had been screaming about for a while: the party’s over, now’s the time to pay the bill.
Until recently, we were in the longest bull run in recorded history, and for good or ill, it warped our expectations of what we should consider as normal in the markets.
In this article, we’ll explore how our warped understanding is making us make critical investment errors now that rules are changing, as well as how to structure yourself wisely to perhaps not only survive the bear market but thrive in it!
Setting the Stage
If you’re under 40 you have likely never been invested during a deep recession. The last one was in 2008 and due to some very clever financial alchemy, the financial apocalypse was postponed.
For want of a better metaphor, what happened to solve the Great Recession was injecting steroids to a terminally ill patient. Sure, to outward appearances they might have seemed fine, and even healthier than they ever were, but underneath the surface, the markets were living on borrowed time.
The Western World started a complex money printing program, known as Quantitive Easing, which essentially relied on purchasing debt and thereby reducing the interest rates. It was so low that debt servicing rates occasionally went negative, so financial entities were sometimes paid to borrow money.
Call it “helicopter money” (as it euphemistically came to be known), or free money, but the point is that this state of affairs propped up the boon over the next decade. It was so successful that it led to the longest bull run in recorded history DESPITE the fact that many financial metrics even prior to this market downturn barely matched the heights reached pre Great Recession.
In other words, we’ve lived in a world where stupid financial decisions weren’t punished, sometimes they were even rewarded. During this decade it became common for companies to develop and have no clear path to profit, as they were confident that the infinite investor money would keep them afloat for the foreseeable future.
Everyone thought they were geniuses, and people thought that this would last forever. Then came COVID and with the lockdowns and money printer on overdrive, average people began to wonder whether the economy as a whole wasn’t built on thin ice.
To succeed in this post-fantasyland environment, where reality is viciously reasserting itself, we must unlearn the stupidity of the last decade and be more sensible about things.
Unlearning Bad Habits
From circumstantial evidence, I’m led to believe that most of my audience is under 40. This means that even if you have been in crypto since its inception, you’ve not really participated in a proper recession.
Sure, you might have experienced drawdowns and prolonged bear markets in specific assets, but other sectors of the economy remained viable and profitable. Not only that, but some Western countries, like Australia, sidestepped the Great Recession in its entirety as they had demand for their resources from unaffected countries like China.
But this has meant that a whole generation of professionals believes that assets only ever go up. At the moment, it’s not rational investment proposals that rule our investment decisions, but FOMO (Fear of Missing Out).
Fundamentals matter so little in this state of affairs that we have JPEGs worth more than houses. And the vast majority of the public invested in assets barely cares how they work, or whether the business model is sustainable. Crypto, for instance, is often referred to by its investors as “number go up technology.”
However, reality is reasserting itself, and we can’t afford such wilful ignorance any longer. Instead of gambling and trading, we now have to go back to the school of value investing, where you pick assets with solid fundamentals and stay there for many years, if necessary.
Economically hard times are like a brushfire that wipes out the driftwood and nonsense accumulated through inefficient resource allocation. All those traders/entrepreneurs/grifters selling courses and scams will disappear once people begin to understand that money isn’t so easy to come by as they claim.
When reality takes back the reins, you need to have vision and emotional control in order to succeed. You can’t just go in and out whenever you feel like it and still claw a profit.
Just to make a point, the international bank JP Morgan made the argument that had an investor purchased an index fund of the S&P-500 on January 3, 1995, ten years later they would’ve made an annual return of 9.85%. Nevertheless, had this investor missed the ten best days within this period, they would’ve only made a 6.10% return; worse still, six of the ten best days were within two weeks of the worst days.
This means that one would’ve surely ended up missing the ten best days within a decade, had one tried to time the market, and it would’ve cost them almost 40% of their potential profits.
In other words, an entire decade’s worth of investing results might come down to not making dumb mistakes during critical periods. Given the insane volatility in crypto, this is probably far truer in this industry than in traditional investing.
So as much as it has become a meme in the crypto world to HODL, to not trade your assets and keep them for long stretches of time, it does seem to be the winning strategy forward: find a good project with a solid business model, a decent chance of success and a good team, invest in it and wait.
The era where you could just gamble and go in and out of projects while making insane profits has likely come to an end. Every percentage gain will cost us and returns are definitely not guaranteed.
The kiddie pool of easy money is closed, now you must swim in the shark-infested ocean of uncertainty if you want to make any profit. To do this successfully though, you will need a plan.
How to bear-proof your investments
First things first. It doesn’t make any sense to potentially strike it rich tomorrow, if you can’t actually survive until then.
In other words, self-preservation ought to be the priority during bear markets instead of profit maximisation. This will necessarily mean investing in safer/more boring assets, or *gasp* perhaps not investing at all.
I know I’m supposed to be a Cardano shill account, but ultimately I care about the well-being of the people that have trusted me enough to be part of my audience and community. Genuinely, it’s a responsibility I don’t take lightly, and I’m exceedingly grateful for each and every one of you.
Ass kissing aside though, you should not invest in anything in these choppy waters unless you have 6 months worth of living expenses set aside. Now, it bears saying that whenever I’ve said this, a fair few have called me classist/elitist.
“Do you not want poor people to make life-changing money?” they’ll ask.
That’s a fallacy. Life-changing returns, while perhaps more common in crypto than in other sectors of the economy, are by no means guaranteed. I want people to preserve what little wealth they have, and not go into debt.
6 months’ worth of living expenses gives you just that — enough breathing room to not make dumb decisions if you get fired or have an unexpected expense. Believe me, I’ve been there, dangerously ticking down to $0 and no clear means of getting any more money.
I didn’t have any investments at the time but had I had them, I’d have been very tempted to sell them, even if it had been at a substantial loss.
Generally speaking, you don’t want to make emotional decisions in anything that involves money. So don’t put yourself into situations where it’s inevitable that you’ll have to make emotional decisions.
Of course, the counter-argument for this is that inflation will eat away at your reserves. If the economic crisis ends up manifesting as stagflation, hyperinflation or plain old inflation, this is a fair argument. It’s possible, indeed likely, that a portion of your cash savings are going to be eaten away by inflation, even if it’s in tier-1 currencies like USD, EUR, GBP, etc.
But I’d suggest you reframe this expense slightly. It’s not your savings being eaten away by inflation, it’s you paying an anti-homelessness insurance policy. When put under that context, the fee at least looks somewhat bearable.
In either case, let’s assume that you’ve managed to save up six months’ (or even a year’s) worth of living expenses, what now?
How to jump into the markets
Let’s assume that money is no concern and that you’re not going homeless any time soon. How does one best allocate capital into a situation like that?
Well, that primarily depends on the school of thought and the specific life circumstances that you have. We can start with the money itself.
Imagine your rich uncle died and gave you a pile of cash, what do you do now? For practicality’s sake, we’ll just say you want to throw it all into the crypto market.
Now, here there’s a bit of a contentious discussion. Some people will advocate throwing in the lump sum all at once, while others will advocate to put it in gradually. This second option is known as dollar-cost-averaging (DCA), and it involves putting fixed amounts at preset intervals, thereby getting a good price on average, as you’re buying when the market is low and high.
There are good arguments to be made for both camps.
The lump-sum camp will likely mention the old investing maxim “time in the market beats timing the market” and they’ll point to the aforementioned research where a handful of days in a decade account for a disproportionate amount of the returns.
On the other hand, the DCA camp will point to the fact that if you happen to invest at the wrong moment, you might have jumped in at the all-time high. As such, had you waited even a day more you’d have been able to buy double the amount of assets. So, according to them, investing gradually is the best option, given that we only know in hindsight what prices were low or high.
However, this is the internet tricking people into thinking that they need to choose a side. It’s not a binary, it’s a spectrum. Why not do half lump sum and half DCA, or whatever proportion you’re comfortable with, weighted towards whichever argument convinces you the most?
The broader point is that you need to pursue strategies that don’t just make sense, but allow you to sleep well at night. If an investment makes you lose sleep, then whatever you paid for it is too much.
The Sad Reality
Unfortunately, most of us don’t have a rich uncle that wants to give us unfathomable riches. If we’re lucky we have a paycheck. In other words, past the initial considerations of whether to throw in your savings, or doing it gradually, you’re more or less forced into a pseudo-DCA strategy.
Now, you could do this in the relatively blind and boring way of earmarking a fixed percentage of your salary onto this and putting it in every preset period, or you could be a bit more creative. As the first strategy is somewhat obvious, I won’t spend much time discussing it, and instead, focus on the second one.
I don’t think I invented this strategy, but I’ve not seen other people discussing it, so I’m coining a name for it until I see evidence that it existed prior to me. The short version is that you take the money you have available and set limit orders for them at lowball prices, and then just wait. I call each order I put a “bear trap”.
In other words, what the bear traps do is create a descending ladder of prices that will trigger whenever there are downwards shocks. Worst case scenario is that they don’t trigger and you keep your money.
It bears mentioning though that there are ways to get ahead of the crowd, even with this passive strategy. For instance, people have a bias toward certain numbers, you can see this in the order books, anything ending in 0 or 5 are often support areas, as people default to them.
So set your buy orders for weird numbers like ending in 3 or 7 to get ahead of the rest. Don’t be shy and put them at much lower prices than you think are possible. Let’s say ADA is at $0.80, then perhaps consider putting buy orders at $0.67, $0.63, $0.52 etc.
There’s also nothing stopping you from changing the orders to numbers that you would prefer. For example, your reserves might be running low, so you’d prefer to only part with your cash at a really good price, so you set a buy order bigger than the rest at the bottom of the ladder you’ve built.
This is primarily meant for people who already own a decently sized bag of the asset they’re interested in, but wouldn’t mind purchasing more at lower prices. So it might be a tad too passive and unreliable for someone who wants to guarantee that they’ll end up with the assets in question.
It’s worth remembering that, especially in bear markets, inaction is a viable and often effective strategy. If you don’t know where the wind is blowing, perhaps it’s worth standing still and getting your bearings. Don’t buy or sell if you don’t need to, and only when it fits your risk tolerance.
It’s why nowadays the bear trap strategy is the main way I accumulate. During good times I deposit money into my Cenralized Exchange (CEX) account, put in orders, where I lowball prices, and then I wait. So, in a very roundabout way, my CEX account works kinda like a bank.
Every so often I get to catch “flash crashes” where the price wicks down to a super low price for a few moments and I manage to catch it. Otherwise, the orders might stay there for a few months, and I’m completely fine with that.
The trick is to make this accumulation strategy as hands-off as possible so that even if I were to die, the bear traps still keep acting to my corpse’s benefit. That way I don’t need to look at the prices, I don’t even have to think about it.
Overall, I don’t know what the future holds before us. I don’t know the particular flavour of the economic calamity that will happen. What I do know is that I want to be prepared for whatever happens.
Generally speaking, it pays to be conservative. Yes, you might not be driving any lambos soon, but you’ll have a roof over your head, and that counts for something.
Furthermore, great fortunes don’t tend to be made during boom times, but during times like these where everyone runs away from investing. In moments like these markets can massively misprice assets as they overreact to short term variables and underplay long term trends.
The best form of investment is one done as detached as humanly possible. Don’t put yourself into a situation where your emotions are guiding your decisions.
Yet before blindly doubling down on a given strategy you had been following during boom times, it’s worth asking yourself whether your investment thesis is still true. Are the premises under which you made the investment in the first place still valid, and will they continue to hold power for the foreseeable future?
If yes, then draw up a plan, and settle down, as it’s gonna be a bumpy ride ahead!
Don’t assume that because some asset has gone down, its all-time-high is indicative of any future prospects. It might just never recover.
Don’t throw good money after bad, really think about whether something has a future.
Besides that, all I can say is good luck, we’re all gonna need a little bit of it before it’s over!
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