The Psychology Behind the Investment Choices We Make, or Don't

Our financial framework is a victim of our personal circumstances

Hey everyone,

I want to introduce my buddy Christos from Simply Finance.

Christos’ motto is

Let’s put some personality back in Finance.

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Why do we participate in markets in the way that we choose? I've been thinking a lot more about what shapes our framework as a market participant lately. 

The opportunity to create wealth by participating in financial markets is invigorating.  It's a fun and exciting challenge. It's addicting, for better or for worse.

There are so many different types of market participants. We all like doing different things.

• Option buyers vs option sellers. 

• Long term investors vs active traders. 

• Index buyers vs stock pickers. 

• Bitcoin maximalists vs alt-coin enthusiasts.

The list goes on and on. 

Let’s dive deeper on WHY we choose to participate in markets the way that we do.  What did we go through, or what did we see our family and friends that are older than us go through, that may have shaped how we view our framework when participating in markets today?

While we do this we need to keep in mind that what was best 20 years ago may not be best today. 

The irony there is that what is best today may not be best 20 years from now.

I have a friend who watched his parents lose their nest egg in the 2008 housing crises.  It was invested in the stock market at that time, and they pulled out around the bottom when the S&P's were down -50% from the highs. 

They never got back in.

He remembers it was a difficult time for his family at that time.  

My friend makes good money, but he doesn't do anything with it. His whole net worth is in cash. Buying a home isn't ideal right now, and he is too scared to invest any of it in the stock market.

He understands his parents mistake was that they pulled out at the bottom and never got back in. He understands they would have done better had they not panicked, and maybe even saw it as an opportunity to buy more. He understands that the US is likely to continue devaluing the Dollar forever and how that essentially inflates asset prices.

Yet, he still is too scared to invest any money in the stock market. He would never dare take up any active trading either.

Imagine how different his financial framework would look if his parents never pulled out at the bottom?

Peter Schiff is one of the most famous gold-bugs around these days. He loves gold, gold-stocks, and gold-miners. He hates Bitcoin.

The gold trade has generally underperformed for the last 15 years.  It has underperformed other assets classes like the S&P's, Nasdaq, and Bitcoin.

In the last 15 years the US government has printed more money than ever before.  Generally, that is a bullish narrative for gold.

Peter Schiff's father was an interesting man. 

The very little I've read about him is that he had a reputation for not liking the government too much. He had civil tax problems with the government for over a decade.

In 1968, he testified before the Senate Committee on Banking and Currency in opposition to the removal of gold backing from Federal Reserve Notes.

In 1976, he published a book entitled The Biggest Con: How the Government is Fleecing You.

Fast forward to today, Peter Schiff has mentioned he heard about Bitcoin very early, before it was even trading for $100 per coin. 

Today it oscillates around $65,000 per coin.

He refuses to invest in it. He refuses to believe it has any worth despite how resilient the asset has been in terms of adoption, security, price, and also wiggling its way into traditional finance.

I watched a debate with him recently and he was asked,

"what would make you change your mind on Bitcoin?”

At first he basically said "nothing."  Then he proceeded to tell us how stupid Bitcoin was some more.

After 5 minutes of this the host pressed him again. 

“There has to be SOMETHING that you see that makes you willing to change your mind.”

Peter went on to say that he wants to see groceries in the store priced in Bitcoin before he believes it has any real use-case.

This is an odd thing to say. Last time I checked I couldn't buy my wild-caught salmon at the grocery store with gold coins.

In any event, imagine how much different Peter's framework might be if he didn't watch his father go through what he did.

I'm not saying it's good or bad. It's something we need to be aware of. At least give it a little bit of thought.

Why?

Because, the Nasdaq is up 10X since 2010. Bitcoin is up... well, 10's of thousands of X since 2010. 

I understand that can be skewed since Bitcoin started at $0. But, Bitcoin is even up 10X since 2020 (just 4 years).

To take it one step further with Peter... imagine if he invested at any point over the last 15 years and watched Bitcoin be the best performing asset in his portfolio throughout those years.

He would probably be more engaged with the community. He would probably have a different view on the asset class. He would probably have a different investment framework, or at the very least, not seem so close-minded and religious about the gold investment.

Peter is a wealthy, successful, and smart individual who has a lot to be proud about in is life, but he would probably also be 10X - 1,000X richer depending on how much Nasdaq and/or Bitcoin he bought, and exactly when over the last 15 years.

His framework wouldn't allow him to though. 

Is that because it is right, or just a “victim of circumstances” as the saying goes?

We're all victims of our own circumstances.

When I try to understand why I participate in financial markets the way that I do it actually scares me a little. I think it should scare us all a little bit.  

My parents owned a small neighborhood liquor store when I was a toddler. My mother would take me to work with her and I would nap on the floor next to the half-pints of booze.

My Dad worked as an engineer during this time also. 

When I was 14 they opened a second liquor store. This one was much larger and needed way more attention, so my Dad ditched the engineer job.

Growing up I can remember being no older than 9 years old and watching my parents count the liquor store cash in the house. 

• Putting it in piles. 

• Writing numbers down. 

• Wrapping the piles up.

• Grabbing another envelope of cash to repeat the cycle.

Balancing the books.  Making sure the IRS got their fair share if you know what I mean.

I thought it was the coolest thing.  That was my first infatuation with money.

From a little kid I would always say to my parents,

"I'm going to be rich!"

I saw my parents work very hard their whole lives to give my sisters and me what we needed.  Especially me, I was a menace.

So as a 13 year old boy with a few school suspensions under my belt already, I'm running around the house telling my immigrant mother how rich I'm going to be in 10 years, and it's only right she pull me down to reality for a second.

She said,

"listen, you're never going to be rich. Get it through your head now."

Maybe you shouldn't say that to a child, but I'm a northeast boy raised around the Boston area with immigrant parents. I can take it.  

From that point on I started thinking more about how do I become rich, and in a way that's easier and faster than how my parents created their wealth? The problem was that I'm only 13 years old, and I also spent a lot of time thinking about how do I get girls to go to the movies with me fast and easy.

20 years later I'm still trying to figure out how to get girls to go the movies with me, but I've also thought a lot more about how do I become rich. The easy way. That led me to become a participant in financial markets. 

Financial markets are "easy," right?

Fast forward to today and the two biggest parts of my net worth are in Bitcoin and my trading account.

I also own the US market indexes, but it's clear to see I've gravitated towards the riskier end of the financial framework spectrum, depending on how you think about risk I guess!

For me, I look at underperforming as one of the biggest risks on the table that not enough people pay attention to. Underperforming by 50% over a period of time is just as bad as losing 50% in a market crash.

I wonder how different my financial framework would be if I didn't remember those vivid moments and discussions about cash and riches with my parents as a kid.

If I were to bet, I'd probably be married with a couple kids, no Bitcoins, a little gold, and a healthy 401k invested in something boring I don't really understand.

There's absolutely nothing wrong with that either. It's just not all that interesting to me personally given my circumstances.  

But it's so interesting to think about why we are allocated the way we are, and is that really for the best, or just because that's the path that our circumstances chose for us.

In other words, are we really allocated to what we think is going to perform the best and/or be the most diversified with risk-adjusted returns, or are we simply allocated to what matches the financial framework our circumstances and past have shaped for us?

It can be a fun exercise to dive into and check yourself on. 

If you're as stubborn as me though, it probably won’t matter.  You'll probably ignore the warning signs and live and die by the sword, for better or for worse.

Time will tell.

Best,
Christos V Simply Finance

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Disclaimer: These are not recommendations and I am not a financial advisor. These are just my two cents, or two satoshis as the kids say. Remember to do your own homework before making any financial decisions. Also, keep in mind I usually have some personal investments in the things I discuss.