As Sir Francis Bacon's old maxim goes, knowledge is power
In the age of instant gratification, social media, herd mentalities and widely shared “I got rich quick, look at me!” stories, it is tempting for investors to be swayed into tossing risk management aside.
Throwing money into investments without fully understanding what they’re buying into is a big risk, and when it comes to investments, it – literally, in this case – pays to do one’s homework. As Sir Francis Bacon’s old maxim goes, knowledge is power.
Let’s take cryptocurrencies, the hot topic of the moment, as an example. Over the last few months hundreds of thousands of people around the world have decided to become amateur investors, drawn to the market by seemingly incredible charts (which many may not even understand) and success tales of young Bitcoin, Ethereum or Ripple millionaires who bought early and hit it big.
How many of these investors, one wonders, know what they’re buying? Or how cryptocurrencies and the blockchain technology they’re based on work, and what the risks entail? For far too many people, a failure to understand these things has already ended in investments gone nowhere, with spur-of-the-moment sales and lost money at the first downturn.
“Most of the people who are just joining and trying to do day-to-day trading without having any financial knowledge actually end up losing severely,” says Mohammed Alsehli, the CEO and founder of ArabianChain, a Dubai-based blockchain start-up. “As a newcomer, look for the long-term investment. You have to be patient and take a much longer view rather than day-to-day trading, because that in itself is a profession. You cannot just pick it up in a day or two.”
An important factor in investment, it should always be remembered, is taking into account dissenting opinions. For every person who is excited about a possible investment, there is another who is wary. More often than not, the one who has taken these views into account is the one who will make a better decision.
In the case of crypto-currencies, an example of a cautionary note is the one expressed in this week’s issue by Steven Rees, managing director and senior investment advisor at JP Morgan Private Bank. While acknowledging that blockchain technology is “certainly interesting”, Rees advises that investors look before they leap. “I think it’s difficult to understand the fundamentals behind them. As an equities analyst, I’m used to looking at cashflows, earnings and demand, so this is difficult to assess,” he says.
“We see plenty of upside in less volatile, less risky assets out there. I’m happy getting 10 percent upside this year by understanding what I’m investing in… Our fear with cryptos is whether people really know why they’re buying them – and whether they are buying it as part of a diversified portfolio.”
Of course, this isn’t to say that one shouldn’t invest in cryptocurrencies, or in commodities, stocks or equities, or, like Karl-Friedrich Scheufele in another of this week’s pieces, classic cars and watches. But before one does so, they would be well advised to know what they’re doing.
Gathering different opinions is vital, but at the end of the day, it’s up to the investor – whether an individual or an institution – to do their due diligence. Read what’s out there, understand the market. And then, and only then, should one part with money.
Diversification is also key. As another wise old piece of advice goes, don’t put all your eggs in one basket. It is rare that going “all in” on one investment is a good idea, although the lucky few that bought Bitcoins in their infancy may disagree. The wisest investors are those who understand that a diverse portfolio is the one most likely to end with healthy returns.
Fortunately, we live in an information age. Never in the history of mankind has so much knowledge been available so easily, in which just a few clicks can lead to seemingly endless streams of information. Armed with this knowledge – and combined with good timing and perhaps a little luck – investors can make sure that 2018 is a fruitful year.