Even if you have experienced several bear markets, the next bear market may be completely different.
Compiled & Translated by: Deep Tide TechFlow
Morgan Housel is a partner at Collaborative Fund and a former columnist for The Wall Street Journal. He has twice won the Best in Business Award from the Society of American Business Editors and Writers, been a finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism, and is also the author of the bestselling book "The Psychology of Money."
In this interview, Morgan provides ten key pieces of advice for cryptocurrency investors. These suggestions cover specific investment strategies, and Morgan's insights are not only applicable to the cryptocurrency market, but also to a broader range of investment fields, making it a valuable resource for investors at all levels.
Hosts: David & Ryan, Bankless Podcast
Speaker: Morgan Housel, Author
Original Title: "10 Lessons for Crypto Investors With Morgan Housel"
Inevitability of Historical Repetition
Morgan Housel firmly believes that market bubbles will continue to exist, whether it's 100 years from now or 200 years from now, just like the technology bubble and real estate bubble of 1999. He points out that historical bubble events, whether 100 years ago or 200 years ago, have astonishing similarities.
Morgan explains that the reason for historical repetition lies in the consistent way in which humans react to greed, fear, risk, and uncertainty. Whether in finance, medicine, military, or physics, people's reactions to these themes are remarkably consistent.
Morgan mentioned economist Hyman Minsky's "financial instability hypothesis," which suggests that if the market never experiences a downturn, people become overly optimistic, leading to excessive debt accumulation and ultimately causing a recession. He emphasizes that stability itself can lead to instability, and excessive stability can drive the system towards instability.
Morgan points out that after every market collapse or recession, people always look for someone to blame, but in reality, these are all part of the normal operation of a capitalist society. He believes that attempting to eliminate market cycles will only make the situation worse.
While Morgan believes that breaking this cycle is almost impossible for society or an industry as a whole, he also mentioned that there is still hope at the individual level. Individuals can break free from this cycle to some extent by recognizing these repetitive patterns and avoiding repeating mistakes in their investments and decisions.
Morgan emphasizes that if an investment can appreciate fivefold within a year, it is equally possible for it to lose 80% of its value within a year. This is particularly evident in the cryptocurrency field, where an investment may appreciate tenfold within a year, but it could also plummet by 80% to 90% within a year due to sporadic news, and some "junk coins" may even become worthless.
Morgan mentioned that many people enter the cryptocurrency market for the first time in the middle of a bull market, mistakenly believing that the bull market will continue for a long time. However, they quickly find themselves at the other end of the market cycle, entering a bear market and experiencing the entire process. During this process, more than half of the people will leave.
In financial matters, if you can complete the sentence "I am a XX investor," then you have almost linked your identity with your investment approach. In a bull market, people may think of themselves as smart or wealthy, but in a bear market, this identity may shift to "I am a failure" or "I am poor," and this close connection of identity with market fluctuations can be damaging to individuals.
Morgan quoted Harry Truman, pointing out that the next generation rarely learns from the previous generation unless they have experienced it firsthand. In financial matters, if you have never experienced a 50% decline, you may not truly understand that experience. Each bear market is unique, even if you have experienced several bear markets, the next bear market may be completely different.
Investment Strategies for Different Market Cycles
Psychological Impact of Exaggerating Returns
Morgan mentioned that the market has a collective memory, and the market is made up of the collective consciousness of participants. Different market participants, based on their age and experiences, will have different reactions to the same events, and each generation will understand risk in its own unique way. For example, young adults who experienced the Great Depression may remain cautious about financial markets for the rest of their lives, while those who were children during the Great Depression may have only heard these stories from their parents.
Morgan emphasizes that what people experience between the ages of 15 and 30 has a profound impact on their lives. During this period, people's brains are still malleable, and they begin to take on social responsibilities, so their experiences during this time will profoundly affect their worldview. There are also differences in the understanding of financial viewpoints between different generations.
Morgan points out that in a bull market, people often feel dissatisfied with their own returns because they envy others. He believes that this envy is one of the main reasons for the bull market getting out of control. Additionally, on some social media platforms, people tend to exaggerate or even fabricate their own success, which may lead to unrealistic expectations and envy in others.
Due to the influence of social media, market cycles have become more rapid. This phenomenon is particularly evident in the cryptocurrency field, where market ups and downs can occur in a very short period of time.
Money, Happiness, and Personal Values
Morgan mentioned that in bull markets, especially in the cryptocurrency market, people often showcase their wealth, which is particularly evident on social media. He pointed out that this behavior can lead to people envying others rather than focusing on their own progress and achievements.
Morgan believes that while money can bring a certain level of happiness, it can only solve money-related problems. True happiness also includes healthy relationships, a good mental state, and a fulfilling lifestyle.
Morgan also mentioned that successful individuals often have a lot of unstructured free time in their schedules. This seemingly inefficient arrangement actually provides space for creative thinking and problem-solving. Conversely, those who schedule every minute of their time often lack the time for creative thinking.
Morgan quoted music producer Rick Rubin, pointing out that people only realize they don't feel any different after achieving their dreams, which can lead to despair. He emphasized that money cannot completely change a person's life experience. Many people actually long for a simple, independent life, but they mistakenly pursue high status. Status is a game that can never be won because there will always be someone richer, more beautiful, or happier than you.
Morgan mentioned that many people may be billionaires in terms of assets, but they carry "social debt" that exceeds these assets. This debt stems from the need for others' impressions and the desire to showcase one's identity and value, which Morgan describes as a burden.
Morgan pointed out that money can be used in two ways: as a tool to enhance personal happiness, or as a standard for others to judge oneself. Many people mistakenly use money as the latter, as a scoreboard for others to judge their success. If people can reduce this need, they can better use money to enhance their happiness.
The hosts stated that when people view money as a tool to enhance freedom, it is the healthiest relationship with money. Pursuing status is an endless and exhausting game, while viewing money as a tool can help people live better.
Morgan mentioned that many consumer goods, such as cars and houses, are often misunderstood in terms of their value. For example, a high-end Toyota car may actually be better than an entry-level BMW because it provides more driving comfort, rather than just flaunting status. Faced with huge financial incentives, even inherently good people may make wrong decisions.
Morgan emphasized that financial incentives can not only lead to negative behavior but also drive positive change. For example, during wars and economic downturns, technological innovation often accelerates due to urgent needs.
Investment Strategy: Balancing Long-Term vs. Short-Term
Morgan mentioned that his own investment strategy is long-term regular investment. Whether the market is booming or in a slump, he invests the same amount regularly in the same investments and plans to hold for 50 years. He emphasized that this strategy can reduce the emotional impact on investment behavior.
Morgan believes that long-term investment does not mean ignoring the short-term dynamics of the market. The long term is actually an accumulation of the short term, and investors need to experience and understand these short-term dynamics, even if their understanding is that some market behaviors are absurd.
In the cryptocurrency field, the emergence of new phenomena such as NFTs and various emerging assets is an integral part for content creators and investors. The appearance and disappearance of these new phenomena are part of the story and evolution of the cryptocurrency field. Morgan believes that investors can adopt different strategies. Some may choose to regularly invest in large-cap stocks or cryptocurrencies, while others may prefer trading and trying new investment opportunities. He thinks both strategies can be healthy investment approaches.
Morgan pointed out that many stock market investors allocate most of their funds to long-term stable investments, while reserving a small portion for trading and trying new investment opportunities. This strategy satisfies their intellectual needs for investment and is also enjoyable.
The Key to Happiness: Embracing Imperfection
Morgan pointed out that in the investment field, effort does not always correlate with results. He believes that many investors misunderstand what they can control and overlook the importance of their own behavior. He mentioned that in bull markets, the best course of action may be to do nothing, and the same applies in bear markets.
Morgan believes that striving for perfection in investment (such as perfectly timing the market tops and bottoms) is often unrealistic. The market itself is full of uncertainty and unpredictability, and if investors realize that their decisions may be imperfect, they are more likely to adopt a conservative strategy, such as diversifying investments, to reduce the potential negative impact of a single decision. Striving for perfect efficiency all the time may lead to severe setbacks during crises.
Morgan believes that embracing imperfection means taking a long-term view. In the long term, the impact of market fluctuations and the imperfection of individual investment decisions on overall investment performance will decrease. Embracing imperfection can also help investors avoid overreacting to short-term market fluctuations. Embracing imperfection is also part of psychological resilience. It is crucial to remain calm and objective in the investment process, even when facing losses or mistakes.
Morgan mentioned that learning from mistakes is an important part of the investment process. Embracing imperfection and learning from it can help investors make better decisions in the future. Embracing imperfection also means being adaptive. Changes in market conditions and personal circumstances may require investors to adjust their strategies, rather than sticking to a perfect plan that may be outdated or not applicable.
Competing with Oneself
Morgan emphasized that in business, investment, and sports, allowing optimism and pessimism to coexist is the key to long-term success. He mentioned that for investors who have fully experienced the cryptocurrency market cycle for the first time, they may tend to invest in cryptocurrencies with complete optimism, hoping to experience the entire cycle from start to finish.
Morgan mentioned that cryptocurrency investors may find their "dumbbell strategy," balancing not only traditional assets (such as cash or bonds) and cryptocurrency assets but also investing in other hard assets such as real estate, which can provide a safety net in cryptocurrency market downturns.
Using Microsoft as an example, Morgan illustrated the characteristics of a successful entrepreneur: being extremely optimistic in technology while being extremely conservative in financial management. Bill Gates once stated that from the day he founded Microsoft, he always wanted enough cash in the bank to cover a year's worth of payroll in case of zero revenue.
Despite many challenges and difficulties in the short term, if one can persevere, significant progress may be made in the long term. Morgan mentioned that in his own investment experience, despite facing various issues frequently, the market has achieved significant growth in the long term.
Morgan emphasized the importance of applying these lessons in market cycles. He believes that these lessons are particularly valuable for those who have fully experienced the market cycle for the first time. If people's expectations grow in line with their income, they will never be satisfied with their financial situation. He stressed that even those fortunate enough to have continuously growing net worth and income will never feel happy if they don't work to control their expectations.
Morgan advocates learning to be grateful for what one has and advises people not to compare themselves with others' current situations but with their own past situations. For example, compared to their past selves five years ago, most people's current situations may have improved significantly, even if they may feel inferior to others when browsing social media.
Morgan pointed out that motivation is an important driver of people's behavior, whether in the cryptocurrency field or other fields, and understanding the motivations of an individual or organization is crucial for predicting their behavior and decisions.
Morgan stated that short-term incentives may drive market behavior, but in the long term, real value and fundamentals will determine market performance. Market dynamics are often driven by the different motivations of participants, which may include the pursuit of quick profits, loss avoidance, or long-term investment.
Morgan mentioned that understanding motivations can help investors better assess risks. For example, if market participants are investors pursuing short-term profits, the market may be more volatile and unstable.
Morgan advised investors to reflect on their own motivations, such as financial goals, risk tolerance, and investment horizon, to develop more suitable investment strategies. If a person's primary motivation is capital preservation, they may choose a more conservative investment strategy.
Morgan emphasized that although the market may be influenced by various motivations in the short term, in the long run, sticking to an investment strategy based on solid principles and understanding is usually more successful.
Risk Management and Avoiding Over-Optimization
Morgan emphasized that investors often try to over-optimize their investment strategies, such as trying to accurately predict market tops and bottoms. However, this over-optimization is often unnecessary and may even be harmful. Embracing imperfection and allowing room for error is crucial in investment. In a world full of uncertainty, pursuing perfection means there is no room for error, which can lead to serious consequences during crises.
Morgan believes that a long-term perspective is more important than trying to accurately grasp market dynamics in the short term. He advocates long-term investment and holding strategies, rather than frequent trading and attempting to predict short-term market trends. Investors should avoid overreacting to short-term market fluctuations. Market fluctuations are normal, and overreacting may lead to unnecessary trades and additional costs.
Morgan pointed out that simplifying the decision-making process in investment can reduce errors and stress. For example, dollar-cost averaging (investing the same amount monthly) can avoid the pressure of trying to time the market perfectly. Investors should cultivate patience and resilience to cope with the unpredictability and volatility of the market.
Morgan emphasized that successful investments often take time, and frequent trading usually leads to higher costs and lower overall returns. Investors should maintain consistency in their strategies and avoid frequent portfolio adjustments due to short-term market fluctuations.
Understanding basic economic principles, market dynamics, and financial instruments can help investors make wiser decisions, focusing on long-term goals and the big picture. Adjusting investment strategies appropriately as market conditions and personal circumstances change is necessary. The market has its natural cycles of ups and downs, and understanding these cycles can help investors better position their strategies.
Optimism and Pessimism
Morgan believes that to achieve long-term success in investment, it is necessary to have both an optimistic and pessimistic mindset. Optimists believe in long-term good returns, while pessimists are prepared for short-term difficulties. He suggested being frugal like a pessimist while investing like an optimist.
Morgan mentioned that he favors an asset allocation strategy called the "dumbbell strategy," maintaining high liquidity and low debt on one end (a pessimistic short-term strategy) and long-term investment in stocks on the other end (an optimistic long-term strategy). He emphasized that there may be various challenges and surprises in the short term, but significant returns may be achieved in the long term if one can persevere. Therefore, he recommended being cautious in the short term and optimistic in the long term.
Morgan emphasized the importance of balancing optimism and pessimism. Over-optimism may lead to overlooking risks, while over-pessimism may lead to missed opportunities. Optimism is an important driver of investment and innovation. Optimists tend to see the long-term growth potential and opportunities, which is a valuable perspective in investment.
At the same time, Morgan also stressed the value of pessimism. Pessimism can serve as a risk management tool, helping investors identify potential issues and challenges to make more cautious decisions. Many significant advancements in history have been driven by optimists, but they have also been accompanied by warnings and balance from pessimists.
Morgan pointed out that market cycles can affect investors' optimistic and pessimistic emotions. In market upswings, optimism may dominate, while in market downturns, pessimism may be more prevalent. He advised individual investors to consider their optimistic and pessimistic tendencies when formulating investment strategies, understanding their emotional inclinations can help in developing a more balanced and suitable investment strategy.
Good Things Happen Slowly, Bad Things Happen Quickly
Morgan believes that good things usually come from compounding, which is essentially a slow process. In contrast, damage often results from a single point of failure, which can have catastrophic effects immediately.
Good investment returns take time to build, while market declines or crises may occur in a very short time. Investors need to understand that building wealth is a long-term process and should not expect significant returns quickly.
Morgan pointed out that because negative events can occur quickly, investors need strategies to mitigate these risks, such as diversifying investments or maintaining a certain level of cash reserves. Psychological factors play an important role in this phenomenon. During market panics, investors often react quickly, leading to sharp price declines. Morgan reminded investors to learn from history, understand the cyclical and volatile nature of the market.
Morgan emphasized that regardless of how experienced investors are, they should remain humble and open to new information. The market is complex and unpredictable, and there is always something new to learn. Investment decisions are always made based on incomplete information, so understanding and accepting this uncertainty is a key part of successful investing.
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