MT11 | Buy High, Sell Higher

There are two investing maxims that you would have heard often: “Cash is king” and “Buy low sell high”. But thanks to an extraordinary amount of economic stimulus/money printing, there is a very real possibility of inflation shooting up and seriously reducing the value of your cash holdings. As a result, proactive investors are desperate to put their money into any kind of appreciating asset, including those kinds of alternate or fringe asset classes without fixed standards of value like crypto, NFTs, startups, etc.

In these markets, the old maxims might not work as well as they used to. The rules of today are different. “Cash is trash’ and ‘buy high, sell higher”. So what should we regular folk do?

Discussion Topics: Buy High, Sell Higher

• Why has cash become trash?
• What would be considered fringe assets in a non-digital world
• A key trading principle – you’re here to make money, not to be proved right
• Buy high, sell higher at work in angel investing
• Crypto is operating under jungle law
• NFTs are good for creators, but buyers beware
• Ultimately these assets will find their place depending on market forces; till then, don’t bet your house
• In summary, inflation fears are forcing people into fringe assets which have no history or standards of value. So approach these markets with care and don’t be the last person standing!

Transcript: Buy High, Sell Higher

If you have spent any time investing, there are two investing maxims that you would have heard often: “Cash is king” and “buy low sell high”. But thanks to an extraordinary amount of economic stimulus/ money printing, there is a very real possibility of inflation shooting up and seriously reducing the value of your cash holdings. As a result, proactive investors are desperate to put their money into any kind of appreciating asset, including those kinds of alternate or fringe asset classes without fixed standards of value like crypto, NFTs, startups etc. In these markets, the old maxims might not work as well as they used to. The rules of today are different. “Cash is trash’ and ‘buy high, sell higher”. So what should we regular folk do?

Hi, everyone, welcome to another episode of MoneyTok, where we help make personal finance and investing simple and accessible through both my own experience. I’ve been doing this for about 20 years now. This show is about money and wealth creation. And we talk about so many ways of making money, bought retirement planning about stocks, bonds, gold, real estate, crypto, so many kinds of things.

Today we also have Neha Agarwal, who is co-hosting the show with me.

Before we start, a quick reminder that most of our episodes come with free tools, templates or other resources you can use on your own financial journey. These are linked in the episode description, so once you’re done listening, feel free to log in, make a copy, and start using it for yourself

Today we have a PDF with 11 Trading Mantras or reminders that professional traders often use to keep themselves honest. Neha herself used to keep a copy taped to her monitor! We also have a template of a trader’s journal that you can use to keep an objective record of your own trades so you have a clear-eyed view of what you did and how it worked out. Trust me, if you’re investing in the kinds of things we are talking about today, you’ll need both

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OK with that let me hand it over to Neha to kick us off.

Did you read that recently someone bought a pair of shoes that were worn by Kanye West (the singer) during his 2008 super bowl performance, for a cool 1 million dollars? Or of course, you have heard of the sale of the first tweet ever for a whopping 2.9 million dollars (paid for in ether for what it’s worth). This was just the most celebrated sale of an NFT (non-fungible token which is a unique digital certificate that states who owns that particular form of online media). 2021 has been particularly good for the sales of NFTs, which seem to just be taking off. And let’s not forget Bitcoin and Ether and Dogecoin and all the thousands of cryptocurrencies which already took off and some of which are already even crash-landing. So who are the people buying all this and why are they buying it?

Why has cash become trash?

Yuval Noah Harari in his book Sapiens, talks of how societies have been sold stories, and the success of any story is how many people subscribe to it. Money and Religion are by far the biggest stories to have been sold, where a concept started by a few becomes the backbone of the functioning of society.

Why is it that a piece of paper, which only has a printed promise to pay the bearer, is so important? If one were to actually try and call on that IOU, what do you think the central bank will do? What are they supposed to give you in exchange for that piece of paper which says 10 dollars? What if the entire population of an economy decided to call good on this IOU?

Traditionally central banks or the paper currency-issuing authorities were supposed to back every unit with a ‘hard’ asset, most typically gold. This gave spine or credibility to the fiat money. So should I go and want to exchange my piece of paper, I will get an equivalent amount of hard assets. But in today’s era of indiscriminate printing, that concept has been left far behind. And why? Because what initially started as an equation, has become a story, a legend, a belief. That money or paper currency has value. You don’t need to test it, you just KNOW it. That is how anything becomes popular. When there is an almost universal acceptance of its value/ideology.

As I said earlier, traditionally there was a constraint to money printing. It had to be backed by a physical asset. This meant that there was a finite supply of money and central banks had to exercise prudence in money printing. In the last 12 years or so, with the politicisation of economics, and the complete abhorrence to seeing any kind of correction in financial markets, the shackles have been removed from the central banks. Globally they have been given a carte blanche for saving the values of 401(k)s. As Mario Draghi, then ECB chief, said in the 2012 Summer Olympics: the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. And it has been. Central banks are like the referees who are also the players. So you better play the game by their rules, else you are not really in the game.

Now as central banks have gone on a money-printing spree to prop up the global economy ( 2008 financial crisis, 2012 euro crisis, 2020 covid crisis) the chart of global money supply looks like a steep second wave of covid (only the ascending part mind you). USA, which is the biggest source and printer of money in the world, grew its money supply by 10 times from 1960 to 2000. It took only 20 years to grow the next 10x, most of which happened since 2008. This has sparked valid doubt about the value of fiat currency.

Ideally, increasing the money supply should have consequences like inflation but due to demographical and technological changes, inflation has been kept at bay so far. (this is a whole other topic) But this has led to another kind of inflation. Those who have money (in the last 15 years inequality has increased substantially) have poured money into financial and physical assets. There has been the longest rally in stock markets, commodity cycle has been running like a juggernaut and US housing market (or any real estate market across the globe for that matter) has been moving up at a scorching rate.

The only two serious hiccups came in 2015 when US central bank or Fed decided to take its foot off the gas on the money printing car (going to show how much of the rally is dictated by supply of money rather than actual demand for assets) and in 2020 when the pandemic and ensuing lockdowns cratered production and demand. And this rally has lead to a belief, which bordering on the holy truth now that asset value can only go up. It doesn’t matter where you get in, but missing the train is not an option. Also, as supply of money increases, you want to protect yourself against a fall in its value (aka inflation) by investing in assets which have a more finite supply.

Rush to hard assets is resulting in fringe-asset frenzy

OK so that’s why property prices are going up. Property is a finite asset, right? There’s only so much land available on earth. Well actually the universe has expanded far beyond those

Yeah I recall learning something like that in Physics. The universe is expanding.

Uff. No…. I mean the universe of assets

Yup stocks are also going up

Not just that. There’s even more

Hmm ok I do know of people who buy and hold fine wine. And some folks collect art, or watches.. or jewellery. I guess those might hold their value as well. Oh and antiques.

Yeah these are all good

*Some light-hearted banter

You are right about art and wine and watches and also about antiques – if they are genuine. But in today’s world there is a new age equivalent of everything. Like everyone says bitcoin is the new gold. Art has become digital art or NFTs and stock market is now being supplemented by more accessible series A and angel investing.

But all these have one thing in common. Unlike with stocks and bonds where you have ways to value the investment and hence try to buy low and sell high, there is no objective measure of value here. One person’s valued antique is another person’s bathroom tile. So here the rules are different. Since you can’t truly judge what is a ‘low’ price, the best you can do is to buy now and hope to sell to someone else higher. In other words, buy high and sell higher, and thereby protect your wealth from financial inflation.

But isn’t that illogical? It goes against most basic investing principles.

I have been a trader, and one of my mantras was, I am not here to be proved right. I am here to make money. As an economic grad, I ideally should apply macroeconomic theory to data, and accounting logic on valuation and trade. But if the market wants to go in the direction opposite to that dictated by fundamentals, it is not for me to question the intellectual logic of it, but to trade the trend of the market.

I have never been into brands. I remember a senior person in my Bank once asked why I do not buy a Hermes bag. I said I don’t see its value for money. A purse costing a fraction of the price will serve me just as well thank you. And he said “that’s your problem. If you always go by VFM, you will never grow your capital (very different from Buffett I know but he has done well for himself). You buy a short supply Hermes bag for 3000 dollars, use it for 6 months, and then, you can sell it as an exclusive special edition piece to so many young people whose life aim is to be able to own just one branded purse. “

And that was the whole lesson in a nutshell. I don’t have to believe in something myself so long as there is a critical mass of people who want it (for whatever reason). But that doesn’t mean I can just pick up any Hermes bag and expect a higher resale value. I have to do my research on which one is a limited edition, what is expected to be the fashion in 6 months, and invest in something which is an intersection of the two. I am a fool if I just buy ANY bag, but I am not if I can do my due diligence and reap some profit from it.

For example, I know you do some angel investing. Why do you do that? Isn’t it illogical to put money into something with so much risk in the hope of making returns far in the future?

Angel Investing

Well, you’re kind of right. Investing in startups is quite a gamble – as you know the data shows that over 90% fail and only maybe 1% turn out to be massive successes. That’s a pretty poor ratio. For example, if you invested like that in the public stock market you’d be wiped out

On top of that, even for successful startups, the money is tied up for years

As far as I know, people do these deals a) to back good founders and therefore perhaps do some good for society b) learn about new ideas c) just an ego trip maybe and d) the hope of outsized returns

As you can see only one of the four reasons has anything to do with money. And for good deals ie startups that are hot and in demand for some reason, you don’t really even have the time, opportunity, or inclination to do much due diligence. You just put in the cash with the expectation that in a few years or months, or weeks, another investor will come in betting a higher amount at a higher valuation and then again another later and so on, I can get out at a higher price than I paid by selling to the last guy. In other words again Buy High, Sell Higher

Crypto boom

Remember the dotcom boom of 2000-01, when you just had to have some ‘dot’ in your name and see it go up in valuation? That’s what the crypto boom seems like now. It is no denying that the crypto market looks frothy. It has already seen a 10x move in 6 months followed by a crash of 50%. This kind of rollercoaster is not for the faint-hearted. What is crypto? I bet 99% of the population involved in Bitcoin has no idea what it is. It is supposed to be an alternative to cash (we will see), but it has a limited supply (wrong: bitcoin may, but crypto doesn’t) are all things thrown around. But if you really ask what a bitcoin or any e-coin is, most don’t know. Heck, the smartest of hedge fund managers don’t know what it is, but want a piece of the action because it’s a case of FOMO.

Ray Dalio, considered one of the smartest fund managers in the world says he doesn’t believe governments will even accept Bitcoin but he is still investing in it because anything is better than cash. It is a confusing yet accurate logic. We live in a story built by the government and central banks. It is difficult to live outside that construct.

Some like Wikileaks have managed to survive and thrive off the grid but for most, it’s inconvenient, to say the least. Yet, we have come to despise their policies, and have little faith in the money backed by them. We are sitting as characters in their story but looking across the fence to see if someone can create an alternative reality so we can jump ship. Till then its aye govt and central bank.

For a long time, gold was considered the default mode of exchange. When money printing started, as we discussed, banks backed it with gold. The collapse of Bretton Wood in 1971 meant that constraints went. But gold was still considered the alternative to money. Whenever inflation expectations rose, so did the value of gold. And in the last 15 years, gold, like almost any other asset, has tracked closely with the growth of the money supply. But it’s a physical asset, bulky, difficult to shift from one vault to the other, and generally cumbersome. In today’s digital age, it looks like a dinosaur. And hence the era of crypto as a money alternative.

They are digital, can be transferred to any account in the globe instantly, and do not have uncle Sam’s stamp on them. The fact they also exist OUTSIDE the hegemony of the ‘corrupt’ banking system is even better. Hence one can appreciate the appeal of crypto, and why it is something which has refused to die off in its decade long life, despite multiple attempts from the governments to kill it. And now the world seems to be divided into 3 kind: Those who totally believe in it, and have been backing it throughout, those who don’t understand it but think that it is better to be involved, and those who don’t understand nor believe in it, and have chosen to ignore it. Who is the greater fool?

Well, I personally don’t believe in crypto. I have studied the blockchain whitepaper, and that went a few feet above my head. But I DO know that bitcoin was not meant to be a currency. It was a required given to an authenticator of a blockchain node, and therefore can only exist in the ecosystem of that blockchain. This thing was then taken out of its ecosystem and used as a means of barter for its limited supply, and for the fact that because of the concept of blockchain, it is an anonymous system of authentication, and unlike for normal money, one doesn’t have to believe the ledgers of the banks.

The fact that it exists outside the ‘system’ has both been its charm and its deterrent. It is difficult to be a character in a story which has no rules of engagement and no one to arbitrate in the event of a dispute. We may despise the government rules, and mistrust central bank policies, but that fact is that without those, we will have anarchy. When someone steals your crypto wallet, who is supposed to go and investigate or catch the thief? That remains its biggest issue.

Last few years have been spent by various interest parties to define the construct, but doesn’t that in a way take away its biggest USP? Of being a currency of people by the people for the people? But it still is jungle law in the world of crypto. If Elon Musk was moving the price of any stock with his tweets the way he has been doing with bitcoin, he would be behind bars, and rightly so. Trading on privileged or insider information has been a punishable offence in the world of financial assets for decades. Also, despite there being enough critical mass in terms of involvement, where even big banks are being forced to get involved, governments are still not only turning their noses away, are actively trying to crush them.

While Jamie Dimon (CEO of JP Morgan) has gone from denouncing crypto, saying it’s a joke to accepting it as something the bank could and should trade, Chinese government has recently banned bitcoin mining altogether. And that makes sense. Why should any government support anything which undermines its authority and over which it has no control.

Also, the idea that it has limited supply is flawed. The supply of A particular crypto is limited, but not the supply of crypto by itself. The mind already reels with all the ethers and doges

But does that mean it should be avoided? As already mentioned, Ray Dahlio hit the nail on its head by highlighting that despite all its faults, its something he is investing in. There has been a subtle shift with corporate treasuries directing more and more money in crypto. Already about 5% of corporate treasury money sits in crypto. That’s a sizeable shift. Governments have realized that they cant ignore crypto all together. So they are trying to kill crypto that they cant control and instead introduce their own version of crypto. China is looking to introduce its own e-coin by next year and has already floated digital yuan.

NFTs and their uses

And then there are NFTs, which are also exactly the kind of thing that I think you might want to buy, Amit

Haha, you know me so well. Yes, I must admit I’ve browsed NFT sites and done a lot of reading on the topic. Unlike a lot of others, I actually think NFTs have the potential to do a lot of good. But I also think it is pretty early in the game and the market needs to develop a lot more. At least it needs to become like the fine art market, for most people to be doing much more than browsing

So what good do NFTs do?

OK, so for all of history, creative work eg art, sculpture, writing, dance, music etc needed the artist or performer to sell you a tangible product. Artists and sculptors could sell you their works of art whereas performers would sell you tickets to their performance or a recorded copy of their work.

That was fine, but what about those struggling artists who sold their work just to make ends meet? And then they died in poverty only for their work to start receiving its due recognition afterwards? The buyer reaped the profit but the creator got nothing

And then there’s performance art or art installations. You get something for the performance or the one time showing of the installation and that’s it. It’s not like you can make money off it forever

Finally came digital art, electronic music etc. These generally don’t have a physical form. And digital is basically free for anyone to access. So how do these artists charge for their work? They’re sure as hell not making money from the fractions of a cent they get streaming on Spotify or Youtube

NFTs allow artists to monitise digital forms of their work by creating an artificial scarcity around it. And that’s what makes it a good thing.

However, it’s early days of the market and there’s a sort of frenzy going on that I think is unhealthy and potentially also fraudulent, like with many of the crypto things you talked about

That’s why I say it’s a good thing overall, just not good for the average investor right now. Or at least for sure the investor has to know they are operating in possibly the most extreme form of a buy high, sell higher market

What do you think?

Greed and fear

There is a particular concept which defines the psychology of the market very well. ‘Greed and Fear’. Be fearful when everyone is greedy and be greedy when everyone is scared. When everyone around you, including your old neighbour and the doorman and your cab driver starts talking about an asset and how it has only gone up, it is time to cash your chips.

And never bet your house on something which is this volatile and is so misunderstood.

A lot of these assets are a case of self-fulfilling prophecies. First a handful float a concept, and slowly the belief in it grows till eventually the naysayers also have to accept it as it becomes the dominant belief. And that’s when it becomes the universal truth. Maybe the person buying Kanye west shoes looks like a fool today or some very rich person with money to burn, but if tomorrow, for whatever reason, your bank says it can accept those shoes as a collateral, then even you would want to buy some for yourself. Bitcoins are somewhere in the early stages of that lifecycle.

So I am not here to say this is wrong or right. The idea is to make money, not to harp on the intellectual righteousness of something. And if that is the case, any opportunity to make money missed is your foolishness. Do your due diligence, bet money commensurate with the volatility of the asset, and try and read for signs of greed and fear. The idea is not to buy low and sell high. It is to buy high and sell even higher. Just don’t be the one holding the baby when the music stops

Summary

1. Inflation fears are forcing people to seek returns in an ever-expanding universe of assets, many of which have no history to bet on
2. All these non-traditional assets have no way to determine value for money, hence they don’t fall into the buy low sell high category
3. To succeed in these markets, you need to be aware that you can only buy high and sell higher. So your effort needs to be towards making sure you’re not the last one standing when the market drops. Because when it does, it could free fall down to zero since there is no objective value. this is not a place for the faint-hearted or those with only a little investible surplus. This is a place for those with deep reserves

Our Guest: Neha Agrawal

Today I’m joined by Neha Agrawal, who spent 15 years with large financial institutions trading in the currency markets. Neha talks about the mindset of a trader and how it might be the only way to approach these new hard-to-value, ‘jungle law’ fringe assets.