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The art of losing money and a bit about Bitcoin

Monday, January 22, 2018

Have you ever met someone who seems to be an expert at losing money in investments? Why do they do it? The obvious answer is they take big risks in order to make big money and they accept the fact that this can mean big losses.

 

However, many of these people seem to always lose their money – even if their streak is punctuated by a win they then invest even more in the next scheme and still end up losing money.

 

One of my favourite examples comes from the world of gambling: Archie Karas turned a small stake in Las Vegas into $40 million and then lost the lot. He didn’t even keep one or two million and put them on the side – he had to bet everything he had.

 

 

 

There are also many examples in Australia and for each level of risk appetite, there is the ‘right’ investment that will lose you a lot of money.

 

If you think you are a safety oriented investor but you have that gambling streak, you might notice many advertisements from small financial institutions offering you 5 or 6 percent guaranteed annually that then subsequently go broke with monotonous regularity. These companies lend to property developers who often do badly, taking the financial institution and the investors down with them. It is possible to earn 2 to 3 percent or even a bit more per year extra than you earn with term deposits, but the earnings are not guaranteed unlike with term deposits.

 

For the next level of sophistication we have self-managed superannuation funds (SMSFs). For quite a few people SMSFs are a good idea but for many others they are just a money pit. Here, investors usually don’t lose the lot (though I have seen a few where they lost almost everything) but many still do worse than with the alternatives.

 

If you are attracted to ‘investing’ in Bitcoin and you don’t have special knowledge (and very, very few people have this knowledge) then I apologise but you are quite likely to be among the losing investor group. As the head of a big bank said, ‘Bitcoin is great for criminals and those in repressive regimes who need to hide their money but nobody else’. Yes, the technology behind Bitcoin is important, valuable and exciting but Bitcoin itself is missing the value and is only important and exciting.

One example: Nobody knows where the biggest Bitcoin exchange, Bitfinex, is physically located and in the latest leak of tax haven documents - the Paradise Papers - it was shown that the owners of Bitfinex also own a rival cryptocurrency (Bitcoin has a lot of rivals) that just had $30 million stolen from it. In other words, there is a lot of criminal activity in this space and that is very rarely a space to invest in.

 

If you have a track record of choosing losing investments, then you might like to have a good look at why you are that way.

 

There is usually a cause and until that cause is found the pattern is most likely to keep repeating itself.

 

 

 

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