Just the mention of those two words will likely cause some of you to experience a negative, visceral reaction. But my objective in writing about these two “investments” is not to convince you to invest in them; rather, they represent a metaphor about how you process new information.
And the way you process new information is a big differentiator between advisors who will thrive in the years ahead and those who will be forced to retire prematurely.
Forming Your Identity
We’re all products of the environment we grew up in, the behavior and teachings of our parents, the friends and colleagues we hang around, the cable networks we watch, the books we read, the podcasts we listen to, and the training we’ve received. Add it up, and that’s a tremendous amount of time we have invested in creating our identity.
Then, BOOM, bitcoin arrives on the scene. How does your reaction to bitcoin fit into the “identity” that you have built over the decades?
Those of us schooled in modern portfolio theory and securities analysis learn about efficient frontiers and discounted cash flow modeling (DCF). But nothing in our training prepared us for this bitcoin thing, this piece of software code that spits out bitcoins and has mushroomed to a market cap of more than $200 billion.
You can’t really “value” bitcoin because it is not an operating business that generates cash flow, pays a dividend, or doles out interest. You can’t touch it because it’s digital. You can’t see it. So what’s it worth?
And who is this nebulous creator of Bitcoin named Satoshi Nakamoto?
(Note: Bitcoin—capitalized—refers to the protocol and network, while bitcoin—lower case—refers to the currency spawned by the protocol/network.)
Therefore, as one advisor tweeted to me, bitcoin “is a gamble. It is not real.” And another tweeted to me, “the crypto that aren’t pyramid schemes are gambles and no self-respecting planner would go near them.”
Gold is the same. One advisor tweeted to me, “Gold is to wear not to invest.” Many people think gold can’t even be considered an investment; they think it’s just a shiny metal that looks pretty but generates nothing and yields nothing. You can’t do DCF analysis on something that doesn’t generate cash flow, therefore, it’s not an investment. Or so the logic goes.
Politics is no different. Once ingrained, people rarely change their political persuasions and will even resort to farcical contortions to justify their positions.
Where many of us end up is we have hardened positions, supported by decades of reinforcement, that make it incredibly difficult to have an open mind when presented with something that goes against our current belief systems.
And that, my friend, could be our downfall.
Unless we have an open mind when presented with situations that go against our ingrained belief systems, I think we’ll get left in the dust by those who are willing to be open to new information and, at times, significantly change what they believe and do.
One of my favorite quotes is from Eric Hoffer, who said, “In times of change, learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.”
I’m using gold and bitcoin as metaphors. Many advisors will say those two “things” have no place in client portfolios, while a minority of advisors (a really small number in the case of bitcoin) invest in or are open to exploring the possibilities of those two assets.
I could say the same thing about stocks. With the same level of intensity that many people are vehemently “against” bitcoin, those same people are “for” stocks, and see no other alternative. The thinking? Stocks have always done well, they always will, and I can model them to determine “intrinsic value.”
Again, my point is not to convince you to invest in gold or bitcoin, or that “stocks for the long run” is destined to fail before we’re all dead. My point is to encourage a mindset that is open to the possibility that the world we’re evolving toward could be quite different–and require new tools and new learnings—than the world we’ve been “schooled” in.
Everything works just as it always has, until it doesn’t. For example:
- The stock market never dropped more than 13% in one day, until it dropped 22% in one day in October 1987.
- A barrel of oil never traded for a negative $37, until it did.
- The US never had 40 million people file for unemployment in three months, until it did.
- The S&P 500 never dropped 30% in 22 days, until it did.
- Interest rates on sovereign debt never went below zero, until they did. And so on.
People throw stones when somebody says “this time is different” but the fact is, every time is different. The outcome may not always differ, but the context and environment of every situation is never the same as some historical analogue. And because of that, it is lazy thinking to always default to, “Well, it’s always worked that way.” It will until it won’t.
I first logged on to the World Wide Web in 1994 through my Prodigy online account using a 1200 baud modem. It was a terrible experience and I didn’t go back to the web that year. Instead, I spent a lot of time on Prodigy—which was very cool for the time.
The next year, 1995, one of my colleagues at Securities America said, “I think we’re going to be trading stocks online at some point.” I said, “No way.” Boy was I wrong!
A couple months later in mid-1995, my colleague arranged for us to visit the University of Nebraska at Omaha. We got a “demo” of the World Wide Web and I was amazed at what it could do. I then realized this was going to be a BIG thing. Within a few months, I put a business plan together, pitched it to Securities America’s senior management, and by late 1995, I had launched Securities America onto the internet.
I share that story because it taught me an important lesson: be open-minded! And ever since then, I’ve been very conscious about trying to keep my eyes and ears open for things happening at the fringes and being open to the impact these fringe things might cause.
Here are the three strategies I use to avoid being “beautifully equipped to deal with a world that no longer exists.”
- Be aggressively open-minded but selective in changing. Essentially, be extremely curious about new developments. Watch and monitor them. Don’t immediately dismiss something new because it doesn’t fit neatly into your existing narrative. No need to be on the cutting edge but don’t get so far behind that you end up on the cutting floor.
- Understand the case for the opposite of what you believe. Confirmation bias is insidious. Avoid it by actively seeking out people and opinions that are the polar opposite of yours. Think about where they may be right and where they may be exposing your blind spots.
- Have a plan for being wrong. Perhaps the biggest impediment to changing a long-held belief or identity is that we may have to admit we were wrong, misinformed, or, perhaps worst of all, get shunned by our tribe. To cushion that blow, have a plan B for any of your important decisions. That way if you are wrong, you will live to play another day.
Like my initial reluctance to be open to the idea that the World Wide Web could become an online trading technology, the world is full of surprises. The more we can keep an open mind, the more likely we’ll experience them as positive surprises.
[Bonus: To learn more about cryptocurrency and blockchain, listen to my 2016 podcast with Alex Tapscott here and my 2017 podcast with Jim Dowd here.]