7 Short Thoughts on Investing
Managing strategy and psychology in the most volatile market in the world
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7 Short Thoughts on Investing
At the end of each issue of The Monty Report, I usually do a section called Salmon Bites where I share a few fun morsels, highlights, or short-form thoughts.
This week, instead of one long post, I am sharing 7 Salmon Bite-Sized Thoughts on investing.
What is a Good Investment?
The War on Hedonic Adaptation
Investing is an Infinite Game
The Freedom to Transact
Do you have an NFT Wish list?
Managing your Psychology
#1 - What is a “good investment?”
What is the purpose of investing? There are potentially multiple purposes, but almost all of them fall under one meta-purpose: To help you live a good life.
The definition of “the good life” is personal. My good life is not your good life.
That said, I would wager that for almost everyone, the good life includes low levels of stress, enough sleep, and a strong sense of well-being.
So, why then, are so many investors and traders perpetually anxious, tired, and dissatisfied?
If the very process of executing your investment strategy consistently diminishes your good life by causing you to lose sleep, neglect your loved ones, and feel anxious, then are you actually making good investments?
#2 - The War on Hedonic Adaptation
Hedonic Adaptation is a term that describes the perpetual cycle of adapting to what you have and then wanting more.
If you are a hedonic adapter, then anytime you get more (money, houses, NFTs, clothes, prestige, freedom, whatever) you experience a temporary increase in life satisfaction.
However, you quickly adapt to your new circumstances and it becomes the “new normal.” Then you begin to feel vaguely dissatisfied and you trick yourself into believing that the only way to feel satisfied again is to get even more. And the cycle continues.
Hedonic adaptation is a perpetual cycle with strong internal momentum. It will never stop on its own. The only way to slow or stop this powerful force is to recognize it, and then wage war against it.
(Strategies to resist hedonic adaptation are a good topic for another post, but if you have any of your own, please reply and let me know.)
#3 - Investing is an Infinite Game
“There are at least two kinds of games,” wrote James Carse in his seminal book Finite and Infinite Games: A Vision of Life as Play and Possibility. “One could be called finite, the other infinite. A finite game is played for the purpose of winning, an infinite game for the purpose of continuing the play.”
Investing is an infinite game, which means the #1 rule is to survive.
The key to survival is asset allocation. And the key to asset allocation is discipline.
Do not be fooled by the stories of successful YOLO plays that made new millionaires overnight. There is massive survivorship bias at play here. For every success story, there are dozens that did not survive to tell the tale.
Once you have a handle on asset allocation, then you can have the freedom to make high conviction plays. And you probably should.
Let’s say your net worth is $1M. Depending on your risk tolerance, maybe it makes sense to ape really hard into a high conviction, high-risk play with 2% of your net worth, or $20k. To put this in context, that could look like buying 30+ NFTs from a collection with a floor of 0.2E that you think has the potential to 10X. The potential upside is +180k, and the potential downside is -20k.
The upside would be quite meaningful, increasing your net worth to 1.2M, and the downside would be negligible and definitely survivable - you would go to 980k. You could make this bet 5 times, and be wrong 4 of them, and still come out ahead by +100k.
But it only works if your allocation to each bet is sized correctly. Otherwise, you risk:
Surviving, but losing a sufficiently high amount to destroy your confidence or to logarithmically diminish the volume and size of bets you can place.
Surviving, or possibly even winning, but living in a constant state of anxiety.
Three bad (but avoidable) outcomes.
If you want to be a star player in the infinite game of investing, then learn to survive, cultivate patience, and allocate with discipline.
#4 - Anchoring Bias
As I noted on Twitter last week, one of the biggest afflictions for many investors is anchoring bias.
This occurs when you attach undue weight to the price at which you first see an asset.
For example, if you first noticed World of Women at 0.08e, then by the time they were at 1.8e you thought you were too late and you never bought one.
On the other hand, If you first noticed World of Women at 3.2e, then you saw them drop to 1.8e (this actually happened), then 1.8e seemed cheap and you decided to buy one.
Do you see the difference? Same price, two different reactions, based totally on an arbitrary anchor.
This definitely happens to me, and I try to keep an eye on it.
The World of Women example is a real one for me, I finally conquered the bias and bought at 2.7e and I am so glad I did (the floor is now around 9.5e).
It happened again recently - I had been watching mfers by Sartoshi since 0.2e, but I never pulled the trigger. Finally, when they hit 3e, even though they seemed really expensive compared to what they were, I realized I had conviction they would still run up a minimum of 3X from here, so I picked one up.
Do you fall prey to anchoring bias?
#5 The Freedom to Transact
If you’ve been following the news, you are aware of the Canadian government employing emergency powers to freeze the financial assets of striking truckers and their supporters.
This, perhaps more than anything else in the recent history of Western democracy, should wake people up to the importance of decentralized finance, self-custodial banking (AKA crypto), and the freedom to transact.
Writers much more eloquent than I have already written extensively about this, namely @punk6529, and I encourage you to read their thread in full:
The freedom to transact is at the core of a free and liberal society, and we must be vigilant against policies that curtail this freedom.
p.s. It looks like minds are starting to be changed by this.
#6 - Do you have an NFT Wish list?
There is so much going on in this space. New drops every day. So many projects. It’s impossible to keep up. It’s way too easy to get swept up in the latest hype cycle and FOMO into PFP collection after PFP collection - chasing gains but instead getting stuck with a bunch of jpegs you feel no real connection to and that you regret buying.
Anyone who has been in the space for longer than a couple of months knows what I am talking about when I describe this feeling of overwhelm and regret.
One antidote to this feeling of being at an all-you-can-eat buffet with limited stomach space? Ruthless focus.
This is where lists can help.
Recently I made a list titled “NFT Wish List.” Then I ranked my top 10-20 artists or collections I’d like to focus on acquiring this year.
What were the criteria for my list?
Artists and projects that I believe in the long run (5+ years) have a shot at asymmetric cultural relevance and upside. In other words - work that I believe will be desirable for years to come (some of which might even be museum-worthy in the future).
Note 1: I allow myself to transact outside of my wish list, but it is all in service of increasing my resources so that I can allocate more to my wish list.
Note 2: All of this is happening with the part of my portfolio allocated to “NFTs” - See Salmon Bite #3. I am aware that all of my bets could be wrong or go to zero. Such is the nature of such a wild and volatile space. If that happens, I am allocating accordingly so that my core life will not be affected (i.e. no foreclosures on the kennel, no margin calls, etc.)
#7 - Manage your Psychology
It’s a brutal market out there. 10 ETH can turn into 5 in under 24 hours with a single misstep, a poor trade, or bad timing.
Things move fast and furious. Sentiment changes by the week. Portfolio swings of plus or minus 20 or 30% or more are not uncommon.
The prospect of a massive bear market (another crypto winter) is not outside of the realm of possibility. In fact, it might be starting right now. Or maybe this is just another dip before the next big run-up. Who’s to say?
People are making massive gains, and also taking massive losses. Fortunes are being made, and then destroyed.
It’s all enough to fuck with the minds of even the most level-headed people.
And most of us don’t come into this as professional traders. For many people, NFTs may be the first time they have really been exposed to the ups and downs of more active investing. Side effects may include anxiety, depression, loss of sleep, excess adrenaline, and looping thoughts.
One of the meta-skills of good investing is managing your psychology.
With so much uncertainty and volatility in the market right now (and perhaps for months or years to come), this skill seems especially important.
I could write an entire post on managing your psychology in the metaverse, and perhaps I will.
In the meantime, I simply ask that you think about how you could improve in this area. What steps could you take that would be helpful?
What did you think about this issue of The Monty Report? Please head over to Twitter and let me know. Be sure to tag me - @MontyMedici - in your post so that I see it.
Until next Monday.
🐾 Monty 🐾
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This newsletter is provided for informational, educational, and entertainment purposes only. It is not intended to be used as legal, tax, investment, financial, or other advice. I may or may not have positions in any projects, tokens, securities, or art that I mention. You should always do your own research, make your own independent decisions, and consider consulting with legal or financial advisors before engaging in any financial transactions.