Over the last year or so we have seen an unprecedented rise in what I would describe as meme investing, defined as the act of investing (gambling) in assets that have recently enjoyed a spike in cultural significance.
This has led to an explosion of volatility in these assets (1), as well as their respective prices.
Could these meme assets be described as bubbles? Yes and no. History doesn’t repeat but it does rhyme (2). The price movements of these meme assets seem to be very bubble-like. They also display the typical Ponzi-Scheme-Esque trait of bubbles: many are buying because they believe the price will continue to rise and they can sell to a bigger sucker to make a quick buck. Most are based on a probably premature vision of the future, also a typical attribute of bubbles.
But, at the risk of being a prisoner of the moment (3), there does seem to be something slightly different about this recent trend. There does seem to be some kind of non-financial motivation. Many are apparently taking the approach of perpetual ownership (HODL/”diamond hands”), regardless of price- or so they claim, at least.
A change of heart
My approach until recently was to simply ignore these speculative booms. My reasons were as follows:
- I know how badly people get burnt by bubbles. Better to not play the game, this saves time and prevents stress. Abide by your principles. Invest for the long-run.
- I don’t understand them. I don’t fully understand the technology behind bitcoin or the prospects of Tesla. I don’t invest in stuff I don’t understand (4).
- It’s not part of the plan. I can’t afford to participate. I have other things I want to buy. Other investments I want to make.
This approach is solid and probably right for most people.
But some people may fair better overall by taking a slightly different approach. I have realised I am in this category.
Riding the wave
Surfers spend most of their time waiting. They wait for an attractive wave. One that they can catch. One that they will have fun riding if their timing is right.
Sometimes they are too late and the wave passes them by. Sometimes they are too early and it crashes on top of them. Sometimes their timing is right but they lose control and “wipeout” (5). And sometimes, just sometimes, they ride the perfect wave. Surfers live for these moments.
Your approach to meme investing should be the same.
We have already seen how bubbles can be dangerous. Many people lose money. Some lose lots of money. Investing, in the short-term, is a 0-sum game. For there to be losers, there must necessarily be winners. This is one of the reasons why so many participate in bubbles: the chance to profit.
Profits are there for the taking in meme assets, but how can one access these without most of the downsides of investing in these types of phenomenons?
By acting like surfers: waiting for the right opportunity and take small risks (wipeout) for the opportunity of a big gain (catching a big wave).
Take a small position and have clear, strict rules about how and when to liquidate your position (6). Invest 1-5% of your net worth in speculative bets with big upside. This can be done in a specific account designed for this purpose. Have some small % of your income go to this account, as part of your overall personal finance structure, and keep it there as dry powder. Wait for a wave to come. Then, when you see an opportunity, go for it (with pre-set rules).
This ensures that:
- You won’t go broke investing in these memes.
- You have upside. There’s a chance these assets go to the moon and you don’t really want to miss out on that. It’s damaging, both financial and psychologically.
- You don’t get FOMO. You don’t feel (most of) the psychological pain of not investing in speculative manias.
- SITG. You can back up your opinion with an investment. Your talk with walk.
You should treat these investments as experiments, mostly done for fun (like surfing). Always bear in mind that they are acts of a gambler, not of an investor. This mitigates the temptation to pump more capital in when your “investment” doubles in 3 weeks.
Rules of the game
For those who want to play (7), I would highly recommend setting rules before you take the plunge. Just “using your judgement” to decide when to sell probably won’t work. Your judgement probably sucks. Especially when it comes to investing.
A far better approach is to determine when you are going to sell. This could be a specific price level, a specific time, or when some external indicator hits some certain level (8). For example, I could plan to sell bitcoin when (if) it hits $100K.
You may decide not to follow this rule, of course. Ultimately the main purpose of this account, and investing in general, is to make your life better. If a position is causing you to stay up at night, spend all day looking at the price, or pay even less attention to your girlfriend’s boring stories about her arguments with her friends, it’s probably not worth it. In this circumstance, it’s better to sell. This is why rules can be powerful: they are highly beneficial both from a financial perspective and a psychological one.
(1) GME was recently trading at pretty high implied volatility.
(2) Paraphrasing Mark Twain.
(4) Buffet abides by this. Despite my doubts over his ability, he does have some solid rules/philosophies.
(5) Apologies to surfing enthusiasts for the lack of terminological knowledge.
(6) This is a kind of “barbell approach” that Taleb describes in Antifragile. It’s also consistent with Chamath Palihapitiya’s advice to hold a small % of your net worth in bitcoin.
(7) This is not for everyone. Most people will be better off not getting involved in this type of foolishness and sticking to a solid personal finance structure with a boring investment plan. Only if you feel you have investment opinions or you think this stuff is fun/exciting or you can’t bear missing out, I would get involved. Otherwise, don’t bother.
(8) This could equate to a plan to hold the assets forever.