Investing: Trust The Process Not the Outcome

One can tell whether it’s a good shot or not without knowing the outcome, even when the outcome is seconds away

Matt Levine is brilliant. He is one of our favorite writers. He has a huge following with over 300,000 subscribers to Money Stuff.

Yet, inadvertently, Levine is perpetuating the “one-can-invest-in-Bitcoin” myth. Reasonable investors are getting harder to find, Matt, precisely because we, as a society, completely lost track of what investing means. And when a person of your caliber uses the I-word within a 1-mile radius of crypto, it really doesn’t help:

We used to talk a lot around here about “tokenomics,” the idea that (as I once put it), in crypto, “every product is simultaneously an investment opportunity.” Bitcoin was originally conceived as a way to send payments digitally, but Bitcoin was also an investment. Specifically, it was an investment in that payments mechanism: If in the future everyone will use Bitcoin for payments, they will need Bitcoins, so you should buy Bitcoin now to get rich later. And that investment case helps with adoption: People buy Bitcoin to get rich, so Bitcoin is more widely adopted and businesses start taking Bitcoin for payment, so more people buy Bitcoin to use it, so the early adopters get rich, etc., in a virtuous cycle.

So, Matt Levine is in the club with millions of other people, all of whom are thinking that one can invest in Bitcoin (or, more broadly, crypto). Warren Buffett has never set foot in that club.

This is precisely what the Bill Miller - Warren Buffett spat was all about. Buffett gave his usual spiel:

If you offered me all the bitcoin in the world for $25, I wouldn’t take it.

Bill Miller responded:

The objective of investing is not to own productive assets, the objective is to make money.

As we said, Club Moneymakers is under new management. But, if investing and making money are the same thing, riddle me this:

Adam buys a crypto token at $80 (for this example it doesn’t matter which one). Brian later buys the same crypto token at $200. The price then goes down to $100. Brian sells it for a loss and Adam decides to HODL for now. Whose trade was considered an investment here?

1. Only Adam

2. Both Adam and Brian

3. Neither Adam nor Brian

Note that we did not include the “Only Brian” option in the answer set. We suppose people would not pick that option. Brian lost money. Adam didn’t (yet).

Of the three options available, we suppose most people won’t pick 3, either because the consensus, apparently, is that one can invest in crypto (it’s funny how Coinbase, the crypto exchange actually admitted crypto is not an investment in one legal filing, but we digress). If you happened to pick 3, we agree with you.

Your answer may have been 2, both Adam and Brian, even though Brian lost money and Adam didn’t (yet). That goes counter to the idea that investing is about making money. If it is, how can you characterize a trade as an investment even though it lost money? We’ll come back to that.

So, for those of you who picked 1, Only Adam, let’s keep going. Riddle me this:

The price of the same crypto token keeps plunging. It’s now down to $40. Adam decides to sell everything for a net loss. Was his original trade an investment?

1. Yes

2. No

Well, if you responded 1, Yes then you just contradicted yourself. Brian put in $200 and exited his position at $100, a 50% loss. You concluded he wasn’t investing. Now Adam is in the exact same position; he bought in at the $80 mark, exited at $40, for a 50% loss. Adam became the new Brian! You are treating Adam and Brian differently, and that’s why this pair of answers is a contradiction.

If you answered 1, Only Adam to the first question but 2, No to the second, now there is another problem. Together, your answers imply that Adam was an investor when number go up, but stopped being an investor when it went down. Your position is that whether a trade is an investment or not depends on the outcome of the trade. In other words, you are now treating Adam and Adam (in the two examples) differently and that’s why this particular pair of answers is also a contradiction.

We can see all of this in a decision tree:

One can even extend the latter situation to see why it does not hold together. Imagine this particular crypto token is really schizophrenic, with the price bouncing between $40 and $100 over the next week or so.

Under this hypothetical scenario, your characterization of Adam looks like a fortune telling daisy. He is an investor one day, not an investor the next day, then investor again one day, and not an investor the next.

Here is the problem when people equate investing with money making. If investing and making money are perceived to be the same thing, the human brain tends to focus on the outcomes and not the process. The outcome is the only thing that matters.

Howard Marks, the Co-Chairman of Oaktree Capital Management, a global investment manager specializing in alternative investments, showed us the problem with this interpretation:

In investing, there is a lot of randomness. And, if you look at investing, as a field without randomness, where everything is determinative, you’ll get confused, because you will not draw the proper inferences from what you see. For example, just a brief example, you see somebody and they report a great return for the year. The scientist who thinks that the investment world runs like the world of physics might think well, great return that means the guy is a great investor. But in truth, it might be somebody who took a crazy shot and got lucky. Why, because there is a lot of randomness in the world.

So, right there, that should be the end of the conversation. You might object and say, duh, there are good investments and bad investments. If you make money it’s a good investment and if you don’t, it’s a bad investment. If this is how you think, then you probably answered b) both Adam and Brian to the first question above in the first place.

So, let’s go down that rabbit hole. The obvious problem with that approach is that there is no way to tell whether anything is a good investment or bad investment until someone exits their position. What if they never sell the asset? In theory, we may not know whether somebody made a good investment or not before they pass away. That’s a rather strange conclusion isn’t it?

That said, please don’t conclude that the problem is duration. At the end of the day, one can always look at the market price of the asset and use that as a basis. The problem is being outcome-focused (whether a trade has been exited or not) rather than process-focused.

In fact, in another area of life, where the outcome of your decision is known within seconds, what separates the good from the bad is still not the outcome. It’s the process. One can tell whether it’s a good shot or not without knowing the outcome, even when the outcome is seconds away. And, in that field, the concept that somebody might take a crazy shot and get lucky is not controversial at all.

It's a game called basketball.

---