Never invest in an asset for which you don’t understand the maximum risk.
The curse of a bull market is that everyone is drawn into the awe of rapidly rising prices due to the fear of missing out (FOMO). The emotion of greed plays on the mind that looks for reasons to justify it. And thus, the sacred relationship between risk and return is completely overlooked. While returns draw all the attention, risk sounds boring and unsexy.
The carnage in crypto-currencies is a strong reminder of what happens to your current and future wealth when you take off your eyes away from risk and rationality.
The majority of investors lost their hard-earned money by speculating on cryptos, NFTs, technology stocks, and whatever sounded like a quick money scheme because they didn’t want to MISS OUT and unfortunately now missing their money.
Knowing what you are doing is the most important aspect of any investment. As Warren Buffet said, “Risk comes from not knowing what you are doing”. And to know what you are doing, you need to first understand how much risk an investment entails and your ability to bear it. If you can’t understand the risk, you can’t even find the fair value of any asset.
I couldn’t find any person who could tell me how to value a cryptocurrency and that’s why I completely stayed away from it.
Now, how do you evaluate the maximum risk? For this, history comes to the rescue. History has taught us that equity markets can correct by more than 50-60% and can take many years to recover. Speculative investments with no real utility (there could be an imaginary utility to create the narrative) have fallen by 80-100% of their value and never recovered.
Although the specifics are different every time, the underlying playbook and human behavior are the same which follows the cycle of greed and fear.
That’s why reading history and human behavior is totally unavoidable for successful investing.
This won’t help you to make extraordinary returns in a bull market but your portfolio will fall much lesser in a bear market.
This will ensure consistent & sustainable long-term wealth creation & preservation. This is all that matters.
Originally posted on LinkedIn: www.linkedin.com/sumitduseja
Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.
