Tim Ferriss and Kevin Rose have a regular, but non-periodic podcast episode called The Random Show. They are good friends, and so they get together to discuss a wide variety of interesting topics on each episode.
The most recent episode was released on Jan. 19th, and you can watch it on YouTube (link below). In the show, they discussed bitcoin, and cryptocurrency investing, what they learned from 2020 and how to think about 2021, great books, and lucid dreaming. In particular, I want to share the takeaways from the episode from an investing perspective. I think there is a lot of brilliant advice on how to invest better from two phenomenal investors.
In the episode, Tim and Kevin repeatedly say “do not take this as investment advice”. Please do your due diligence and take nothing from this article as investment advice.
Tim called the sudden jump in the value of bitcoin pure luck. Tim had purchased bitcoin a while ago, and then when the value dropped, he decided it was ‘fun’ money and to let it ride instead of selling all of his bitcoin. Now, with the sudden jump to 40k/bitcoin, it seems Tim has a nice chunk of change from holding his bitcoin.
Both Tim and Kevin do not see bitcoin increasing further in value. They do not see it increasing further in value because they compare bitcoin’s overall market capitalization to companies with a similar market capitalization, or gold, often said to be a similar asset to bitcoin, but who really knows?
Kevin’s advice, if you are interested in buying bitcoin? Use dollar-cost averaging to build up a position in bitcoin. Let’s suppose you want to buy $1,000 worth of bitcoin. Divide that over 6 months and on each 1st of the month, buy $1,000/6 worth of bitcoin, no matter what the price of bitcoin is at that point. If it’s higher, you will get less bitcoin. If it’s lower, you will get more bitcoin. But over the course of 6 months, you will build up a small position in bitcoin. Don’t think of the $1,000 as an investment. Use an amount of money you are okay not touching for a while and then hold for at least 3–5 years.
Don’t invest in things you don’t understand
You may have friends, relatives, or family members come to you saying “hey I want to invest in bitcoin or ethereum, can you help me?” You then ask why. They say that they have a co-worker or neighbour who bought a lot of bitcoins several years ago and now has $500,000.
You should, of course, be cautious about this. Several questions you should ask:
- Do you know what bitcoin and ethereum are?
- Did your coworker or neighbour sell all of their bitcoin?
I’m not a big investor, but I dabble in stocks, and I like to invest in companies where I know what they do, or more preferably, I use their products and services (such as Amazon, Apple, Google).
Define an exit strategy for yourself before investing
Investing is a game of patience. Before going into any sort of investing, set a simple strategy for how you will exit any positions you build up. So if you purchase stocks of Apple, set criteria or a timeframe for when you will sell the stocks. Stocks can be volatile, and you can lose 50% of the value of the stocks at the drop of a hat.
Look at Netflix. Imagine you bought the stock in June 2018. The price of the stock would be $411.
But now look at Dec 2018. The price of the stock is $246. You would have lost 40% of the value from when you purchased back in June 2018. That’s scary!
And if you had sold in December, you would have missed out on the gains when it bounced back (currently at $586 at the time of writing in Jan 2021).
What should your exit strategy be? I can’t tell you exactly, but if you are going to invest in anything, you need to buy and hold for 3–5 years. If you buy and then sell for anything smaller than that timeframe, it’s more gambling than investing.
Look at things with a three-year timeframe
One lesson Tim learned from 2020: look at things with a three-year timeframe. If you try to look at things (and he uses investing as an example), from a 5 or 10-year timeframe, things can widely change and you do not know why or how it changed. In 1-year, it’s not enough time to effect a change. But three years is the sweet spot: it’s a long enough time for a change and a short enough time you can see how things will change.
From an investing perspective, this means looking at companies (and remember, looking at those you understand), and trying to imagine what the company will be like, and do, in three years. If there are a lot of opportunities, that company may be worthy of an investment.
My friend also told me that three years is the timeframe for change. Imagine, for example, that you want to start a YouTube channel. The first year, you are recording videos, trying to learn systems for recording and editing, marketing it out to others, trying to get subscribers. In the second year, you make fewer mistakes, you have a process down, and you build consistency. The third-year is when you (hopefully) get noticed and grow your channel.