If you’re an investor in anything other than real estate, you’re probably in the middle of a bear market right now. And if you’re a real estate investor… these rising interest rates could mean choppy waters lie ahead. My largest investment by far is Ethereum, and it’s down about 80% from its all time high, so you can imagine what that’s done to my net worth.
And while I have an emotional preference for larger numbers over smaller ones, I have to admit that I’m excited and feel good about what’s going on. I wanted to write about why that is, hopefully help you feel better about it, and offer some practical ideas on what to do.
The first thing to accept is that bear markets are actually a healthy part of the financial ecosystem, just like forest fires are good for forests. In the short term they can feel really bad, but in the long run they are what keep things healthy.
The general idea behind capitalism is that people with excess capital can make it available to those with less capital to help them bring good ideas and productivity to fruition, with both parties enjoying the benefits. While not all aspects of capitalism are good, this core underpinning of capitalism is why I roll my eyes a little bit when people suggest that capitalism is a bad thing.
However, capitalism only works if the resources are going towards productive projects. If the money gets invested in projects that don’t create more value and jobs, it has caused more harm than good. Bear markets are the filter by which we cut out bad projects. It’s a blunt tool, to be sure, but we’d rather eliminate cancer with the relatively barbaric practice of chemotherapy than to let it spread.
Bear markets are good for the world in the long run, even if they’re bad for us in the short run.
You know how I always talk about building out a long financial runway and living below one’s means? The current situation is exactly the reason why, even though it’s hard to imagine such a situation during boom times. Use this as motivation to get to that place, and maybe more importantly, to stay there even when things go back up.
Everyone loves the old “buy low sell high” saying, but then when things are actually low they get scared and forget to buy. Most of the times someone tells me they’re buying an asset it’s when it’s at an all time high and they think it’s going even higher.
There’s no telling what will happen in the future, but if you actually did enough research on an asset to believe in it for the long term, you should be thrilled that it’s cheaper now. If you didn’t do enough research… you may not be thrilled.
It’s also important to understand why we’re in a bear market right now. The primary reason is that there is a liquidity crisis. As interest rates go up, people need more cash to service loans. Where do they get that cash? They sell assets.
When they sell assets the prices of those assets go down. People often borrow against assets (both equities and crypto), so when those prices go down they have less collateral. If they get close to a threshold where they will be liquidated, they must sell as well. This causes a spiral downwards until asset prices become so attractive that those with cash on the side can’t help but buy them.
This is, of course, an oversimplification of what’s going on, but it is the major driver. It’s also done by design. The fed is raising rates to cause exactly this to happen, because with too much easy money in the system people were too eager to buy and caused inflation. Consider it a controlled forest fire.
I’m invested in Ethereum because I am totally convinced that it is going to be a major part of the future. I have no idea if it was overvalued at $5k earlier this year or even today at closer to $1k, but I believe that it will be far higher in the future (to throw a random guess out, I’d guess $15-20k within 2 years). If Ethereum had dropped because it was hacked or a competitor came and absolutely destroyed it, I would sell it at a loss. But since nothing has changed in terms of my core conviction of it being part of the future (and further conviction that the market doesn’t even understand what it can do today), I’m happy to keep buying now.
An analogy might be that if I’m wet because my boat is sinking, I’ll get off the boat. If I’m wet because it’s raining, I’ll stay on the boat.
When Ethereum hit its low point in the last cycle I funded a crypto 401k and bought Ethereum at $80. Even though I already had Ethereum, it didn’t bother me that it was that low because nothing had changed in my conviction of its future importance.
This principle also applies to investing in the stock market. I believe that the world economy will continue to grow in the long term, so I’m happy to add more cash to my all weather portfolio, even though parts of it are down.
A bear market is also a good time to realize that most of your happiness and satisfaction in life will not come from earning money or spending money, but from how you spend your time and the relationships you build. While it’s a little bit less fun for me to daydream about things I might buy in the near future, it’s just as satisfying to sit down and have tea with my friends.
Use the bear market as an opportunity to test your convictions and to learn more about what you’ve invested in. Make structural changes to your life and finances so that if this bear market put you in a tough position, the next one won’t. If you’re still happy about the investments you have and your lifestyle hasn’t had to change much or at all even with asset prices down across the board, congratulations!
Photo is from the volcano on the Big Island of Hawaii. It’s a lot of fun to hike out and see the stars and lava at night. Also it represents all of our portfolios going up in flames…
Great post Tynan to keep things in perspective and not forget that it’s part of natural cycle to clean up the waste. No matter if biological, financial, technical, principles remain the same.
I love you but no longer trust your financial advice.
Pretty sure everything is up that I’ve ever specifically suggested people buy (bitcoin a long time ago, eth a long time ago, all weather portfolio). Anyway… time will tell.
Could be related to your “negative cash” article in 2021-07, where you said it’s “it’s now against one’s interest to hold cash”, and talked about taking margin loans against stocks and putting the money in investments that yield 8% with “no risk”.
I wouldn’t be loving this bear market if I followed that advice.
*”almost no risk”
Why don’t you think that’s good advice? Interest rates have gone up, so I’m now paying ~2.5%/yr, but I still make the 8%, and as I mentioned in the post I left a big enough buffer that market downturns don’t cause any sort of margin call / liquidation.
Because cash has been one of the performing positions in the year since you wrote it. Generally, if you took margin loans and invested them in risk assets, you got destroyed.
Regardless of whatever this investment is that’s paying you 8%, your characterization of “almost no risk” for such investments is borderline irresponsible.
Sure… that’s technically true, but “keep your money in cash” is historically a really bad strategy. My portfolio is down 9.82% vs 11.32% S&P, and of course I also made 6% on around 50% of that (almost no risk 8% vs ~2% interest), so that brings it to -6.82% vs 11.32% S&P. Really not sure what the beef is.
I agree, I love your work but no one can predict the markets, I think the tips must nit have worked out for you either
My bar for publicly saying that someone else should do something is very high. I looked through my blog to find the very few times I made financial suggestions.
Told people to buy BTC at $825, it’s now at ~$20k
Told people to buy Berkshire Hathaway. It’s up 283% since the post vs 175% S&P 500
I didn’t tell people to do this one, but I at least said I was doing it and then showed the results later.
Suggested people buy real estate in Vegas. The house I mention went up ~300% in price in 6 years, which certainly outpaces national (I think national is ~20% total, but didn’t look hard enough to find good data).
You could very well argue that it’s luck (and I’d agree that some of it is), but I believe my track record of investments I publicly talk about is 100%. If you can find a post or anything where I’ve suggested anything that wasn’t a great investment… I’d love to see it.
I’ve never claimed that I can predict the market. I believe that the market is accurately priced (and have said so many times in posts where I explain why stock picking is a bad idea). Maybe it’s worth a whole other post, but I have come to understand that there are forces outside of markets that affect the prices (e.g. the massive need for liquidity right now), and that if you’re in the right position, you can benefit from it.
All that said… I only write to give people stuff to think about. You shouldn’t just copy whatever I do. I’m just defensive about this because I’m super careful with what I suggest others do and I think my track record is pretty spotless.
Cardano is such a superior project to ETH, IMO. Stacking is way better of a model on Cardano. No locking or slashing. Community is great in Cardano too. Charles Hoskinson actually communicates with the community. Project has a scientific model, etc.
I really like your column but I think cryptocurrencies are a scam. By all means invest in blockchain technology but currencies are not the solution that the blockchain is trying to solve.
“My largest investment by far is Ethereum, and it’s down about 80% from its all time high, so you can imagine what that’s done to my net worth.”
I’m… baffled. Been reading your blog for years and think you’re a smart guy otherwise, but investing any non-discretionary money in crypto is very stupid. It’s basically a lottery.
It’s your money and you can do with it what you want, but yeah really wouldn’t recommend it.
Well, if I’m down 80% and don’t mind, it’s probably discretionary by definition, right?
I know what I’m doing. I understand crypto at a deep level, I understand risk and EV at a very deep level, and I’m really comfortable with my position.
While it is high variance and relatively risky, to call investing in Ethereum a lottery is ignorant. You’re either offering an opinion on something that you don’t know about, or you are completely disregarding the work of many extraordinarily talented computer scientists.
Hey Tynan, would you give a sentence or two on my you guess Ethereum will be worth $15k within two years? Thank you for your blog
I love that you covered the bear market. I also love that you got into it with the dissenters. My experience of you is that you do indeed have a very high bar when it comes to recommendations.