Date: 5/11/2021
Author: Mr. X
One of the better pieces of practical advice I ever received (as I imagine most wisdom is received) came from a bartender. He was full of stories about having to keep people out of a bar that was already closed, people refusing to leave well after last call, or those drunks tossed out going on to wander the streets for more booze.
“What exactly do they think is going to happen?” he asked rhetorically. It’s not like a limo filled with supermodels and money is going to magically appear outside some dive at 3AM. At a certain point in the night, you need to accept that if you keep doing what you’re doing, nothing good is going to happen. Wandering around putting yourself in extreme situations will probably just end with you in a jail cell or worse. As he put it, “Don’t chase the night.”
For traders, we could put this another way. Don’t chase yesterday’s gain. When the news is reporting on something like the sudden increase in the price of a cryptocurrency, or what stock has gained 200 percent over the course of the pandemic, that isn’t a sign to buy in. It’s a sign to stay away, or at least enter with extreme caution and only if you see long-term potential. If everyone is talking about a major gain that they are about to make, then very few people are actually going to make money off it. The conventional wisdom is almost always wrong. If it wasn’t, everyone would be rich.
When the lights are on and people are staggering towards the door, it’s not the time to show up and start throwing money around.
A recent example of this was the sudden rise and fall of Dogecoin before Elon Musk appeared on Saturday Night Live. When Tesla’s Tecnoking was first announced as a guest, Dogecoin rallied. This isn’t surprising. Almost everyone could predict that this would happen – but far fewer anticipated when the bottom would fall out. Many people assumed that during Musk’s appearance on SNL, he would do or say something that would suddenly legitimize Dogecoin and send it soaring over $1.00. Instead, “contrary to expectations,” as one publication put it, the price plummeted as the show was taking place.
Yet this shouldn’t have been contrary to expectations. Dogecoin is a meme coin and though it may actually have some future value because some companies are accepting it as payment, it won’t be “legal tender for all debts public and private” anytime soon. People were buying it with the intent to sell after a spike. But if everyone is sharing an expectation about when that spike is going to occur, you get a kind of “Prisoner’s Dilemma” type situation where each individual investor has a reason to exit before the other guy does. The one with the most trust in the “movement,” as some online were ludicrously putting it, are the ones who are left holding the bag.
We’ve seen this before over the course of the pandemic. The Gamestock [GME] rally was incredible for those who got in at the right time – before most people were talking about it. However, by the time you were seeing it all over Twitter and being written up by mainstream journalists, there was nothing left to gain. Even a movement meant to stick it to the hedge funds ended up simply being used by some hedge funds against other hedge funds. Like memes themselves, “meme stocks” or “meme coins” are ruined the minute they become mainstream.
Another way of putting this truth is “Buy the rumor, sell the news.” You sell when the world gets confirmation of what you already think you know. We’ve seen plenty of that over the last year too. Companies gain in the run-up to earnings reports, beat those earnings reports, and then the stock plummets anyway. People had already bought with the expectation of these earnings. When the results are reported, it isn’t confirmation of their wise decision to buy. It’s a sign that everyone is about to head for the doors and pocket their profits.
This may sound obvious, but it’s sorely tempting. Everyone wants to be a part of “a movement,” especially one that seems fun, exciting, a way of sticking it to the man, and also makes everyone rich. But you must ask yourself the question – how threatening can something be to the System if the entire mainstream press is talking about it?
While Dogecoin has faded, new meme coins are rising. Journalists are writing about Safemoon and as this is written, Shiba Inu coin is being covered by Newsweek and is trending on Twitter. Perhaps these coins have some room to grow, but if they’ve already gotten to this point, the short-term gains are probably over. If you’re turning to Newsweek, because you want to make a 1,000 gain on an obscure cryptocurrency, you’re doing it wrong. I mean this seriously – you’d have better results scrolling through anonymous message boards. Of course, an even better decision would be not to “chase the night” and stick with something that isn’t just based in social media or speculation.
Still, just because you weren’t in something at the beginning doesn’t mean there’s no point in looking at it again later, when attention fades. Bitcoin’s high in January 2020 was about $9,500 – and that was after it was long established as an alternative investment. If you bought in at about $20,000, you did well, even though it has retraced from its recent highs.
Similarly, you may not be one of the “Dogecoin millionaires” who bought absurd quantities of the coin when it cost below a penny. But even after its recent “collapse,” it’s up over 600% compared to where it was just a month ago – and that was after countless #DogeToTheMoon trends and clickbait articles. A few weeks ago, people were wondering whether it would break a dime. Now, after the bottom has fallen out, it’s over $0.40. If you bought at $0.20 and sold at $0.40, congratulating yourself on the gain is better than berating yourself for what might have been.
Studying the past is useful because you can learn from it, but your attention should always be for the future. If you see an asset spike, instead of imagining what you should have done, think about what you can do tomorrow. Don’t chase yesterday’s gain. Don’t chase the night. Don’t wake up with nothing to show for your efforts but a hangover and a whole bunch of red all over your portfolio.
