Lets Get This Bread

Rise and grind, crypto traders…let’s get this bread.

In yesterday’s email (click here if you didn’t get it) we dissected the XRP spike and came to some pretty interesting conclusions

Markets are pretty awesome machines for calculating what something is worth pretty accurately today

If you think that the market has gotten it wrong then you ought to think things through carefully, because most times I’ve thought this I’ve been wrong.

That’s not to say markets don’t get things wrong.

But the reasons markets get things wrong are usually behavioral not mechanical.

We are a slightly smarter than normal species of monkeys who wear shoes and don’t think we are monkeys.

We have a bunch of behavioral biases baked into our DNA from our caveman prehistory.

Story Bias

Caveman Scott had no internet access. He spent a fair bit of time sitting by a campfire telling and listening to stories.

At a DNA species level, we are hardwired to overweight anything that’s told with a convincing story wrapped around it.

Which is why all the macro grifters in the financial world who are always claiming the dollar is about to collapse and gold is about to spike sell a lot of subscriptions but their predictions never come true.

Risk Adversity Bias

Caveman Scott breaks his arm, it's probably going to get infected and he’s probably going to die without modern medicine.

Caveman Scott has to be risk averse.

This might not sound like a big deal but it really is.

In fact, this is the basis of the biggest deal in the whole investment allocation universe… the equity rate premium.

You see, even though we look like modern space age techno-adepts, right down in the DNA where it counts we still have that same old DNA.

Owning stocks is RISKIER than sticking your cash in the bank, and it freaks us out in ways we find hard to articulate.

All things being equal, nobody would prefer to take the risk of stocks unless they were going to make more money by doing that.

So, on average, stocks tend to outperform bonds because humans are risk averse.

You might also note that if stocks are riskier than putting your cash in the bank, crypto is risker again.

It seems reasonable (and that has in fact been what happened) that a rational investor might require a larger premium for investing in crypto.

If you wonder WHY crypto has always gone up, this is why.

Recency Bias

Caveman Scott hears a rustling in the bushes. That could be a tiger about to eat his ass. (and not in the sexy way)

He has to overweight recent evidence.

This is the cause of most of the biggest financial fuckups of all time.

Assuming (makes an ass of you and me) that the recent past will continue.

In 2010 investors had such PTSD about the recent crash that stocks were priced at a stunning, once-in-a-century sale… and still nobody wanted them.

In my beloved Australia right now property hasn’t gone down since 1991.

There is a collective disbelief that property might not be a fabulous investment that doubles every 7 years (the median house price where I’d prefer to live in Sunshine Beach is 3 million USD).

This is overweighting recent evidence, plain and simple.

In 2012 investors were still butthurt about the dot com bubble popping and were reluctant to jump back in tech.

As we all know, Amazon, Microsoft, all those tech monopolies were the best investment ever.

Sigh. This is why we can’t have nice things.

And in our beloved crypto casinos… right now investors are so traumatized by the brutal bear market they’ve just been through that it seems logical that less people are open to investing in crypto than before.

Which obviously is the best time to invest, right?

When you strip the bullshit out of it, we only have two ways to get paid.

We can be smarter than the market, which is very, very difficult.

Or you can take on risk.

This is the real secret sauce behind all my trading systems, and all those trading systems of the elite quant traders I know.

We are harvesting risk premia.

If you look for the risk premia with the most evidence behind them, its a shockingly short list.

Trend - things that go up have a tendency to keep going

Carry - things that pay an interest rate are attractive

Value - buying cheap stuff is smart, innit?

There’s a couple of others, but those are the meat and potatoes of it.

I’ll be giving a seminar this Wednesday 7pm EST (Thursday morning for Australians) on how to Double Your Wealth This Year from Crypto

Register here

Scott

P.s. I’ll continue on with the series of emails tomorrow, so watch out for it.