Early in the New Year I sat with my extended family celebrating a birthday at a beautiful venue outside Plettenberg Bay. The ages of all 18 present ranged from 18 to 58 although in our clan age does not protect anyone from banter or voicing their opinion. Discussions and chirps ranged from the goings on of the previous evening, golf handicaps, to the hangovers being nursed today even though it was now lunch time.
There are some seriously bright people in this group, amongst them 2 Actuaries, 3 Accountants, a Physio, at least 5 youngsters studying engineering, CFA, medicine or business management and me, a qualified Financial Planner. Eventually someone mentions BITCOIN...
It was interesting listening to all the different opinions and believe me everybody had one. They ranged from "It's like buying a bag of S..t to "What if it is the future and we are missing out???". One thing was clear and that was that nobody could explain what Bitcoin is, even the actuaries.
What really bothered me was that most of the youngsters own some Bitcoin even though they have no idea what it is. As a Financial Planner I am fully aware that the majority, well over 90%, of people do not save enough for their future. I also know that people's attitude to investing and money is very easily determined by past experiences and that any experience can affect future behaviour and thereby their lives. In my business I do not charge our clients' children anything at all until their investment reaches R100,000; this is because I understand that if they do not see their funds grow they could very easily draw the conclusion that traditional investments do not work. My goal is to make them responsible long-term investors which in turn will ensure that they live comfortable lives.
I am someone who admits to not understanding anything about Bitcoin, in fact I have not really tried to analyse it too much as I believe that my job is to help my clients build long term plans and assist them through transitions in life. I rely on experts to do the asset management as they are qualified to do this and surely a team of these bright sparks will do a better job than myself. I believe in keeping it simple. I do however have access to these experts who explain to me in simple language how they make investment decisions and the processes they have in place to assist them. These people have a successful long-term track record of managing money.
In my work I understand how destructive emotion can be for investors and I spend a lot of time educating clients on managing this. Fear and Greed are the chief destroyers of investors and their families' lives. Bitcoin, in my opinion, is going to create more destruction any previous Ponzi or pyramid scheme mainly due to social media fueling these two emotions.
If I told you about a certain share which had grown by 1,000% this year (but couldn’t really explain why) and told you that it was time to buy as it was going to still grow more, you would tell me I was crazy or dismiss me as a con artist. This is what has happened with Bitcoin, yet people are buying it, how does this make sense? I have been lucky enough to attend 3-4 investment talks in the last few months where panels of investment experts from all the major investment houses were asked about Bitcoin. Every time the response was the same; stay away from it, it’s a pyramid scheme, it’s a bubble. Surely not all these experts can be wrong?
Finally, two issues which I think we should consider if Bitcoin turns out to be the scam it looks like.
When Bitcoin crashes a few people would have made extraordinary amounts of money while the vast majority will lose everything they invested. From a moral viewpoint I have an issue with this if I was one of the few who made money as it would have been at the expense of many others.
The second point which concerns me is that investors who make money will start to believe that 200%+ p.a. returns are possible. This will poison their minds as the benchmark will have been set in their minds and regular market returns will seem boring or conservative. This attitude would almost certainly lead these investors to self-destruct.
Let’s see what happens, maybe the experts and I are wrong but trust me; boring works!