Good Decisions or Good Results? Part 2: Apply the Learnings

How do we apply the lessons from Part 1 towards investing and generating wealth?

First, Maximize the Probability of Success by Being in the Market

"Timing the market" is a strategy that involves trying to predict when to buy and sell investments in order to avoid downturns and take advantage of price increases. Many people believe that this is the key to successful investing. But it is not!

"Time in the market, not timing the market, is the best way to build wealth."

Instead, research indicates that rather than trying to time the market, it is better to simply be invested in the market for a long period of time.

To illustrate, even if an investor had perfect market timing and invested in the stock market on the day with the lowest prices, their annual return would only be 9.16%. In contrast, if they invested on the worst day of the year, they would still see a return of 6.91%. That's a difference of a little over 2%.

Now let's look at what that investor risks giving up by trying to time the market. This study found that if an investor had tried to do so over the last 15 years and missed the just top 10 performing days, they would have missed out on returns that were more than 2.5 times their initial investment."

To use a crypto example, let's consider that the current price of Bitcoin (BTC) today is around $16,600.

Looking back, its unlikely an investor who had purchased BTC at $300 in July 2015 would regret today not having waited until January 2015 to buy at $175. (The purchaser at $300 would still be up 55x.) However, an investor who did not make a BTC purchase at all (due to waiting for the price to reach $100) would likely regret that decision every day.

Don't be caught on the sidelines watching investments you have conviction in continue to go up.  Waiting for the perfect opportunity may result in missing out on significant gains!

Invest in Opportunities with Strong Fundamentals 

I know what you’re thinking, “Mike! Not all investments are the same. Some do go to zero!”

It is important to recognize that not all investments are equally likely to succeed.

To increase the chances of success, it is advisable to invest in companies with strong fundamentals and to carefully evaluate potential investment opportunities through due diligence.

Due diligence is a process that involves examining an investment carefully in order to assess its potential risks and potential for performance. The goal is to identify the strengths (or "positive fundamentals") of an investment and contrast them with any weaknesses (or "attributes that indicate a lower probability of success"). This allows investors to make informed decisions about whether or not to invest.

There’s a lot of research that goes into due diligence. While most necessary information is readily available for publicly traded stocks and digital assets, it may be more difficult to obtain for privately held companies. 

The sections of a due diligence report might cover the following:

Market & Sector Metrics - Metrics that pertain to the market as a whole, known as market metrics, and metrics that focus on specific segments of the market, called sector metrics, can provide investors with valuable information about the direction of the market and assist them in deciding where to invest their money. These metrics can provide investors with insight into the overall direction of the market and help them make informed decisions about where to allocate their investments. Is the company in a “trending” sector with lots of inflow of customers? Or is it in a legacy sector that's struggling to stay relevant?

Financial Metrics - Financial metrics are measures of a company's financial performance, such as its profitability, solvency, and liquidity. Some examples of financial metrics include revenue, earnings per share (EPS), return on investment (ROI), and debt-to-equity ratio. Financial metrics are typically calculated using information from a company's financial statements, such as its income statement, balance sheet, and statement of cash flows. 

Operational Metrics - Operational metrics are measures of a company's performance that relate to its day-to-day business operations. These metrics can provide insight into how efficiently a company is running and whether its meeting its goals. Some examples of operational metrics for a company's stock may include customer acquisition cost, user engagement, average order value, and retention rate.

Comparative Metrics - Comparative metrics involve evaluating how a company compares to its competitors on certain financial and operational metrics. These metrics can provide investors with insight into the company's relative strength and help them make informed decisions about which company's might be market leaders and outperform their peers. Some examples of comparative metrics include market share, profitability, growth rate, and customer satisfaction.

Digital Asset Due Diligence

Lets use the example of examining a cryptocurrency protocol.

Like the internet, cryptocurrencies have protocols. Any cryptocurrency – Bitcoin, Ethereum, XRP – has its own distinct protocol. 

Protocols provide the security for and access to a blockchain. A protocol is a set of predefined rules that dictates how a blockchain operates, and by which all network participants must abide for the blockchain to function. These rules may include the type of consensus algorithm that defines how nodes interact with each other, the governance structure, incentives (such as inflationary rewards) and penalties (such as slashing) for participation, and application interfaces.

Conducting due diligence on a crypto project involves thoroughly evaluating the protocol to ensure that it is secure, effective, and reliable. 

Here are some steps to conduct due diligence on a crypto protocol (We'll dive deeper into these in following newsletters):

Review the protocol's white paper: The white paper serves as a detailed business plan for the protocol. It provides information about the design, functionality, and objectives of the protocol, as well as insight into the project's technology, team, and tokenomics. By reading the white paper, you can gain a deep understanding of how the protocol operates and what it is intended to achieve.

Evaluate the security of the protocol: It's important to ensure that the protocol is secure and resistant to attacks. This can involve reviewing the protocol's cryptography, examining its security measures, and testing its resilience against different types of attacks.

Assess the protocol's scalability: Crypto protocols can experience performance issues as they grow in popularity and usage. Therefore, it's important to assess the protocol's scalability to ensure that it can handle a large number of users and transactions without experiencing delays or errors.

Evaluate the protocol's adoption and usage: The success of a crypto protocol is often tied to its adoption and usage by the community. Look for indicators of adoption, such as the number of users, the number of transactions processed, and the volume of trading activity.

Research the team behind the protocol: It's important to research the team behind the protocol to ensure that they are qualified and have a track record of success. Look for information about the team's background, experience, and accomplishments.

Consider the protocol's potential risks: No crypto protocol is without risk. It's important to carefully consider the potential risks associated with the protocol, including technical, regulatory, and market risks.

Seek expert opinions: Finally, it's always a good idea to seek the advice of experts in the field, such as security professionals, crypto investors, and developers. These individuals can provide valuable insights and perspectives on the protocol.

Summary

There’s a lot of fear in the markets right now. When the sky is falling, it's more important than ever to take a step back and look at your purchasing decisions and holdings. Ask questions such as:

1. “Why did I invest in the first place? Ignoring price, are there more positive or negative indicators regarding this investment?”

2. “What does my due diligence indicate? How is the company performing from a fundamentals perspective?”

3. “My investment returns are down. Is my source of unhappiness due to a resulting mindset?”

4. “Do lower prices in fundamentally sound investments indicate I should increase the rate I’m investing in those assets or decrease the rate of investing in those assets?

“You make most of your money in a bear market, you just don’t realize it at the time.”