What can we learn from BitCoin’s surge?

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simplesauce
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What can we learn from BitCoin’s surge?

Post by simplesauce » Thu Nov 30, 2017 12:26 am

(Disclaimer: I am a fairly pure Boglehead. 3-fund portfolio in my retirement accounts.)

Seeing these new BitCoin millionaires popping up everywhere (from their successful speculating); is there something to be said for having a little “funny money” put into a taxable account for speculation?

Again, I fully subscribe to the obvious merits of passive investing for the long-term. That is not my focus today. I’m simply talking about this idea:

For just a small portion of a taxable account, is It worth finding some disciplined speculative sector bets to buy and hold until they rise significantly?

For example:

In early 2016, I was noticing that precious metals were really getting hit hard. In particular, an ETF called PICK was down almost 70% after 2 years. I thought it would be interesting to buy a good amount of shares of this, and hold it for several years expecting it would climb back up eventually.

Because of my Bogleheads principles, I did not act.

Since then, the ETF has risen about 80%.

My question is, while we are all Bogleheads, is it wrong to take some money, put it in your taxable account, and buy an ETF that is heavily out of favor?

To summarize, I would never have speculated on BitCoin because that could easily have gone to zero (among other concerns).

I also think commodities are too volitile and lack fundamentals.

But a diversified sector ETF (PICK has 181 metals and mining companies) that is largely out of favor...is it so wrong to make a funny money bet on a group of companies like this? It isn’t with retirement money. It is simply for the instance that the tides turn and the ETF rises 80% after being down for so long.

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HomerJ
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Re: What can we learn from BitCoin’s surge?

Post by HomerJ » Thu Nov 30, 2017 12:48 am

How much are you going to play with? 1%, 5%?

If it goes to zero, are you going to pull another 1% or 5% out to try again?

How many times will you try?

Even if it doesn't go to zero, how long will you stick with your choice if it's just sitting there doing nothing or going down? What if a new shiny comes along?

Get rich slowly is my advice. Fear of Missing Out (FOMO) is something to be avoided if at all possible.

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randomizer
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Re: What can we learn from BitCoin’s surge?

Post by randomizer » Thu Nov 30, 2017 1:14 am

I don't speculate for the same reason I don't gamble at the casino.
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Re: What can we learn from BitCoin’s surge?

Post by david » Thu Nov 30, 2017 1:18 am

For just a small portion of a taxable account, is It worth finding some disciplined speculative sector bets to buy and hold until they rise significantly?
This is completely different than the bitcoin scenario. In the bitcoin scenario we are talking about an industry in its infancy, basically, there still isn't many good uses for bitcoin right now and there is an industry of competitors without a good business plan. It's like a lottery ticket that is hitting when the value rises. This means a small bet can turn into huge money. In a different industry (e.g., precious metals like you mentioned) that is already well established the ability to make money is real but the likelihood of a lottery like jackpot is not.

Also, you talk about bitcoin going down to 0 as a possibility of the past. This is not true. It could still very easily go to 0 or close to 0 in the near future. Depending on things like government regulation, or the bubble bursting because there is no good use for that particular coin or a newer, better, more useful coin arises that could push all competitors out. The fact that everyone is now talking about "crypto" makes me think this is going to blow up.

That said, it is unlikely a mature sector will go down to 0. Is it wrong to speculate? No. If it brings you joy, then go for it. If it will just cause stress because now you have a baby investment to watch then maybe not. Is it prudent? No.

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Re: What can we learn from BitCoin’s surge?

Post by White Coat Investor » Thu Nov 30, 2017 1:23 am

I worried it was a bubble when I saw Allan Roth buy some.

I'll know it's a bubble when Taylor Larimore buys some. That's your indication to sell.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: What can we learn from BitCoin’s surge?

Post by ccieemeritus » Thu Nov 30, 2017 1:57 am

I've decided not to call anyone a "Bitcoin millionaire" until they actually cash out enough bitcoin to get a million in US dollars.

Because there are no underlying earnings, every bitcoin millionaire will be mirrored by a million dollars worth of lost money from someone else.

EDIT/ADD:

Consider a normal company with a $170B market cap. It has assets. It has intellectual property. It has revenue. It (hopefully) has earnings. Most companies have PE ratios in the 20-40 range. Some of the stock sold was in an IPO where the money went into the company (resulting in assets).

Bitcoin currently has a market cap of $170B. It has no assets. The revenues are a "satoshi fee" on transactions which end up with bitcoin miners. The bitcoin miners need to sell their bitcoin to cash those out. There are no profits or earnings.

I'll guess that the total amount of money spent on bitcoins is less then $20B. That money is not sitting in a vault waiting for someone to cash out. That money was all given to someone who sold their bitcoins and already cashed out.

So now we have a group of people that think they have something worth (in aggregate) $170B. But there are no assets or profits to back this up. Just new people that buy bitcoins hoping it will become worth $340B, at which point they will cash out to people hoping bitcoins will be worth $680B.

Using bitcoin for small transactions is no longer cost-effective, because the average bitcoin transaction fee is now measured in dollars:
https://bitinfocharts.com/comparison/bi ... nfees.html
https://www.bloomberg.com/view/articles ... its-limits

I used to not invest in bitcoin because I considered it risky speculation. But now that I've thought about how it has no underlying profits, no underlying assets, and (now that transaction fees have skyrocketed) no transactional purpose, I realize the only way to profit is for someone else to put money in. That moves it from speculation* to an unethical Ponzi scheme in my mind. Now I'm glad I never participated.

* I don't consider speculation unethical, unless you are doing something to manipulate the market.

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Re: What can we learn from BitCoin’s surge?

Post by Iridium » Thu Nov 30, 2017 3:39 am

simplesauce wrote:
Thu Nov 30, 2017 12:26 am
<Snip>
For example:

In early 2016, I was noticing that precious metals were really getting hit hard. In particular, an ETF called PICK was down almost 70% after 2 years. I thought it would be interesting to buy a good amount of shares of this, and hold it for several years expecting it would climb back up eventually.

Because of my Bogleheads principles, I did not act.

Since then, the ETF has risen about 80%.
<Snip>
Looking at a chart of PICK, I would call your timing on that ETF extraordinary. Your near trade happened at almost the exact bottom of a several year slide, from which it still has not recovered. If your strategy had been to buy in at a 50% drop, you would have bought in at roughly $25 in July 2015. You would be up a bit over 20% in about two and a half years and underperformed the market as a whole. Given how small changes in the 'how hard this sector was hit' gives vastly different performance figures, and you have not proposed an exit strategy (so there is no way to know if you would have held on all the way to 80% growth): I would say that in your non-trade, you were more lucky than good.

I think you know in your gut that any strategy you try is unlikely to result in long term over-performance, as some hotshot manager would have tried it and become famous for his/her ability to beat the market over multi decade stretches. So, I am not sure what utility a speculation class would serve, other than to let you feel smart every once in a while. I suppose there are worse hobbies to have, but, even if so, why not get a paper account at a broker and try some of the really fun trades (why buy depressed ETFs on paper when you can buy depressed ETFs on margin on paper)?

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Re: What can we learn from BitCoin’s surge?

Post by Valuethinker » Thu Nov 30, 2017 4:04 am

HomerJ wrote:
Thu Nov 30, 2017 12:48 am
How much are you going to play with? 1%, 5%?

If it goes to zero, are you going to pull another 1% or 5% out to try again?

How many times will you try?

Even if it doesn't go to zero, how long will you stick with your choice if it's just sitting there doing nothing or going down? What if a new shiny comes along?

Get rich slowly is my advice. Fear of Missing Out (FOMO) is something to be avoided if at all possible.
This is very good advice.

I know we differ on expected returns, but I don't think Siegel's 6% real (historic) is achievable from these market levels. 3% real is, to me, a more realistic estimate-- and 0 to negative over the next 10 years. That's simply a view given where valuation is right now.

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Re: What can we learn from BitCoin’s surge?

Post by HopeToGolf » Thu Nov 30, 2017 6:02 am

This is not complicated. This is gambling just like investing in individual stocks (or even index funds). The only questions are do you know more than the counterparty or market and will luck be on your side.

There is nothing wrong with gambling. Some bets have better odds than others.

Can you afford to gamble? How much can you risk?

simplesauce
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Re: What can we learn from BitCoin’s surge?

Post by simplesauce » Thu Nov 30, 2017 6:33 am

White Coat Investor wrote:
Thu Nov 30, 2017 1:23 am
I worried it was a bubble when I saw Allan Roth buy some.

I'll know it's a bubble when Taylor Larimore buys some. That's your indication to sell.
Wait a second. Taylor and Allan are buying BitCoin now?? This is a shock to me. They are two of the most disciplined investment authors I know!

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Re: What can we learn from BitCoin’s surge?

Post by azanon » Thu Nov 30, 2017 7:47 am

White Coat Investor wrote:
Thu Nov 30, 2017 1:23 am
I worried it was a bubble when I saw Allan Roth buy some.

I'll know it's a bubble when Taylor Larimore buys some. That's your indication to sell.
Beautiful! :mrgreen:

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Re: What can we learn from BitCoin’s surge?

Post by Call_Me_Op » Thu Nov 30, 2017 7:53 am

White Coat Investor wrote:
Thu Nov 30, 2017 1:23 am
I worried it was a bubble when I saw Allan Roth buy some.

I'll know it's a bubble when Taylor Larimore buys some. That's your indication to sell.
That's about as likely as Bogle himself buying some. Ain't gonna happen.
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Re: What can we learn from BitCoin’s surge?

Post by 3funder » Thu Nov 30, 2017 10:01 am

I don't think we can learn anything actionable from Bitcoin's surge. You're either comfortable investing in something that's very difficult to value or you're not (I'm not).

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Re: What can we learn from BitCoin’s surge?

Post by bobandsherry » Thu Nov 30, 2017 10:17 am

Perhaps someday we'll see Bitcoin included in this write-up:
The Greatest Market Crashes
https://www.investopedia.com/features/crashes/

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Re: What can we learn from BitCoin’s surge?

Post by an_asker » Thu Nov 30, 2017 10:21 am

White Coat Investor wrote:
Thu Nov 30, 2017 1:23 am
I worried it was a bubble when I saw Allan Roth buy some.

I'll know it's a bubble when Taylor Larimore buys some. That's your indication to sell.
It will definitely go down once I buy. I am yet to buy bitcoin.

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Re: What can we learn from BitCoin’s surge?

Post by nisiprius » Thu Nov 30, 2017 10:22 am

This popped up in one of those little banner ads yesterday. Heaven help us.

Image
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Re: What can we learn from BitCoin’s surge?

Post by technovelist » Thu Nov 30, 2017 10:26 am

"The only thing we learn from history is that we learn nothing from history." (attributed to Friedrich Hegel)

Also remember that one of the "victims" of the "South Sea Bubble" of the 1700's was Isaac Newton(!)

(http://www.businessinsider.com/isaac-ne ... ble-2013-4)

So a sky-high IQ is no guarantee of not falling for a fantasy of riches.
Last edited by technovelist on Thu Nov 30, 2017 10:40 am, edited 1 time in total.
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Re: What can we learn from BitCoin’s surge?

Post by nisiprius » Thu Nov 30, 2017 10:27 am

Call_Me_Op wrote:
Thu Nov 30, 2017 7:53 am
White Coat Investor wrote:
Thu Nov 30, 2017 1:23 am
I worried it was a bubble when I saw Allan Roth buy some.

I'll know it's a bubble when Taylor Larimore buys some. That's your indication to sell.
That's about as likely as Bogle himself buying some. Ain't gonna happen.
One of the characteristics of a bubble might be called "reverse capitulation" (is it called that?) The calm, level-headed, rational scoffers finally get sick and tired of watching their dumb, foolish friends get rich and jump in, too.
In 'The People, Yes,' poem #45, Carl Sandburg wrote:One of the oil men in heaven started a rumor of a gusher down in hell. All the other oil men left in a hurry for hell. As he gets to thinking about the rumor he had started he says to himself there might be something in it after all. So he leaves for hell in a hurry.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: What can we learn from BitCoin’s surge?

Post by selters » Thu Nov 30, 2017 1:17 pm

I'm thinking that maybe a rational strategy for these bubble type asset classes is to jump on them if you see them forming (choose a definition beforehand) and then use a something like a 200 day moving average strategy to get out once they collapse. I don't have much data to support this strategy. Just a hunch...

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Re: What can we learn from BitCoin’s surge?

Post by remomnyc » Thu Nov 30, 2017 2:32 pm

I think BitCoin's surge is a result of there still being many greater fools.

I have no issues with gambling, as long as you're gambling with money you can afford to lose.

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Re: What can we learn from BitCoin’s surge?

Post by remomnyc » Thu Nov 30, 2017 2:36 pm

"One of the characteristics of a bubble might be called "reverse capitulation" (is it called that?) The calm, level-headed, rational scoffers finally get sick and tired of watching their dumb, foolish friends get rich and jump in, too." - Nisi

On his way to lunch, our chief risk officer just said he's selling all his stocks because he has no confidence in the market and he's putting it all into BitCoin. :happy

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Re: What can we learn from BitCoin’s surge?

Post by Toons » Thu Nov 30, 2017 2:40 pm

Tulip Mania
Revisited
:happy
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Re: What can we learn from BitCoin’s surge?

Post by greg24 » Thu Nov 30, 2017 2:52 pm

Greed and animal spirits.

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Re: What can we learn from BitCoin’s surge?

Post by lack_ey » Thu Nov 30, 2017 3:07 pm

Taking another look, the current prices are really bad for Bitcoin's usability for the kinds of things it used to facilitate, like small donations/tips, paying for relatively cheap goods or particularly services like server time/resources, etc. Typical mining fees to get a transaction included in the blockchain in the next hour might be something like $4 because the conversion rates are so high now.

Of course for sending remittances or other large orders, purchases of relatively expensive illegal goods, and especially money laundering, I guess that's chump change.

Technologically and organizationally, Bitcoin has a lot of problems (and inefficiencies) that some other cryptocurrencies are varying degrees of better suited to handle, but the moral of the story is that the first-mover advantage can be a really big deal. There's a lot of infrastructure built around Bitcoin like payment processors and other facilitators around the world, and Bitcoin has a lot more name recognition, even to the point where many of the relatively informed public know and have heard of Bitcoin, but not cryptocurrencies more generally or any other example.

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Re: What can we learn from BitCoin’s surge?

Post by alpine_boglehead » Thu Nov 30, 2017 3:15 pm

nisiprius wrote:
Thu Nov 30, 2017 10:22 am
This popped up in one of those little banner ads yesterday. Heaven help us.

Image
And? Did you buy some penny cryptos? :P

If I like the content of the website these ads are show on, I usually click some of these ads so the scamsters have to hand over some ad fee to the website (and have less money to pay for ads to try to scam our fellow human beings :D )

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Re: What can we learn from BitCoin’s surge?

Post by oldcomputerguy » Thu Nov 30, 2017 3:38 pm

an_asker wrote:
Thu Nov 30, 2017 10:21 am
White Coat Investor wrote:
Thu Nov 30, 2017 1:23 am
I worried it was a bubble when I saw Allan Roth buy some.

I'll know it's a bubble when Taylor Larimore buys some. That's your indication to sell.
It will definitely go down once I buy. I am yet to buy bitcoin.
Did you buy today?? Reuters is reporting that Bitcoin lost about 20% today.
:shock:
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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Re: What can we learn from BitCoin’s surge?

Post by an_asker » Thu Nov 30, 2017 3:57 pm

oldcomputerguy wrote:
Thu Nov 30, 2017 3:38 pm
an_asker wrote:
Thu Nov 30, 2017 10:21 am
White Coat Investor wrote:
Thu Nov 30, 2017 1:23 am
I worried it was a bubble when I saw Allan Roth buy some.

I'll know it's a bubble when Taylor Larimore buys some. That's your indication to sell.
It will definitely go down once I buy. I am yet to buy bitcoin.
Did you buy today?? Reuters is reporting that Bitcoin lost about 20% today.
:shock:
Not yet ;-)

When I buy, it will go down big, not the token 10-20%!! :oops:

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Re: What can we learn from BitCoin’s surge?

Post by munemaker » Thu Nov 30, 2017 3:58 pm

What can we learn?

Ignore the noise!

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Re: What can we learn from BitCoin’s surge?

Post by onthecusp » Thu Nov 30, 2017 4:03 pm

I was a dot com millionaire in '99 or early 2000, in one stock from a $12,000 investment. The run up and back down lasted all of a couple of hours. I was diversified in other things, but it negatively impacted my trading / speculation tendencies for years and I'm still not quite a millionaire for real. At the time it seemed I could buy, but could not sell. Successful market timing requires both. If I had gone S&P500 I estimate I would currently be closer to $2MM now.

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Re: What can we learn from BitCoin’s surge?

Post by kosomoto » Thu Nov 30, 2017 4:07 pm

It's time to end this nonsense.

Using my uncanny ability to crash markets and lose my money after taking speculative long positions, I have recently purchased bitcoin and ethereum and I expect the value to drop 90% within the year.

:)

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Re: What can we learn from BitCoin’s surge?

Post by BigFoot48 » Thu Nov 30, 2017 4:14 pm

At least a person in olden days could hold a tulip bulb in their hand!
Retired | Two-time in top-10 in Bogleheads S&P500 contest; 12-time loser

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Re: What can we learn from BitCoin’s surge?

Post by JBTX » Thu Nov 30, 2017 4:18 pm

What I know about bitcoin you could put on a postage stamp. But my perception of its perceived value is IF it becomes a major currency down the road.

Total "money" around the world is about $25 trillion, and this number will likely grow. Bitcoin market cap is about $334 billion. If you believed Bitcoin would become 10-20% of transaction decades to come, that could put in in the 2.5-5 trillion range. Total bitcoins used are about 12 million, and are supposedly capped at around 21 million. Thus if bitcoins truly become a global currency, their still could be significant long term upside.

But that is a LOT of ifs.

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Re: What can we learn from BitCoin’s surge?

Post by ncbill » Thu Nov 30, 2017 4:22 pm

Start your own crypto currency to sell.

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Re: What can we learn from BitCoin’s surge?

Post by GoldenFinch » Thu Nov 30, 2017 4:23 pm

White Coat Investor wrote:
Thu Nov 30, 2017 1:23 am
I worried it was a bubble when I saw Allan Roth buy some.

I'll know it's a bubble when Taylor Larimore buys some. That's your indication to sell.
But we all know Taylor Larimore would never buy bitcoin!

Unfortunately, as with all market timing, there is no really sure fire indication to sell and the result will be that some of the bitcoin millionaires will hold on too long and be kicking themselves if they become bitcoin nickel-bag holders. Also I bet there are bitcoin buyers who are already unhappy that they sold too early. This is gambling plain and simple.

To the OP, the problem with speculating with your money is that you are very likely to lose it. Bitcoin is the current happy sensation, but plenty of people have speculated on other single stock investments this year and are now quietly crying somewhere.

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Re: What can we learn from BitCoin’s surge?

Post by nisiprius » Thu Nov 30, 2017 5:01 pm

BigFoot48 wrote:
Thu Nov 30, 2017 4:14 pm
At least a person in olden days could hold a tulip bulb in their hand!
Provided nobody thinks it's an onion and eats it.
In 'Memoirs of Extraordinary Popular Delusions and the Madness of Crowds,' Charles MacKey wrote:The sailor had, it appears, a great partiality for onions, and seeing a bulb very like an onion lying upon the counter of this liberal trader, and thinking it, no doubt, very much out of its place among silks and velvets, he slily seized an opportunity and slipped it into his pocket, as a relish for his herring. He got clear off with his prize, and proceeded to the quay to eat his breakfast. Hardly was his back turned when the merchant missed his valuable Semper Augustus, worth three thousand florins, or about 280l. sterling. The whole establishment was instantly in an uproar; search was every where made for the precious root, but it was not to be found. Great was the merchant’s distress of mind. The search was renewed, but again without success. At last some one thought of the sailor.

The unhappy merchant sprang into the street at the bare suggestion. His alarmed household followed him. The sailor, simple soul! had not thought of concealment. He was found quietly sitting on a coil of ropes, masticating the last morsel of his “onion”. Little did he dream that he had been eating a breakfast whose cost might have regaled a whole ship’s crew for a twelvemonth; or, as the plundered merchant himself expressed it, “might have sumptuously feasted the Prince of Orange and the whole court of the Stadtholder.” Anthony caused pearls to be dissolved in wine to drink the health of Cleopatra; Sir Richard Whittington was as foolishly magnificent in an entertainment to King Henry V.; and Sir Thomas Gresham drank a diamond dissolved in wine to the health of Queen Elizabeth, when she opened the Royal Exchange; but the breakfast of this roguish Dutchman was as splendid as either. He had an advantage, too, over his wasteful predecessors: their gems did not improve the taste or the wholesomeness of their wine, while his tulip was quite delicious with his red herring. The most unfortunate part of the business for him was, that he remained in prison for some months on a charge of felony preferred against him by the merchant.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: What can we learn from BitCoin’s surge?

Post by KlangFool » Thu Nov 30, 2017 5:17 pm

OP,

I lost 50% of my asset from the Telecom bust. So, I will give this round of bubble and bust a pass.

KlangFool

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Re: What can we learn from BitCoin’s surge?

Post by Phineas J. Whoopee » Thu Nov 30, 2017 8:36 pm

nisiprius wrote:
Thu Nov 30, 2017 5:01 pm
BigFoot48 wrote:
Thu Nov 30, 2017 4:14 pm
At least a person in olden days could hold a tulip bulb in their hand!
Provided nobody thinks it's an onion and eats it.
...
What are you going to do if the price of your gold coin collapses? Eat it?

Well, no.

What are you going to do if the price of your tulip bulb collapses? Eat it?

Well, yes.

PJW

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Re: What can we learn from BitCoin’s surge?

Post by TinkerPDX » Thu Nov 30, 2017 9:47 pm

I’ve had similar thoughts.

Bought a single share of Facebook on IPO day—wish I’d put all my NW in it.

Bought a couple shares of Alibaba on IPO day, and ended up selling early at a small profit as the volatility didn’t feel good. It’s of course way up since then.

Bought some shares of KING (I think - mobile app company that maybe bought zynga?) on IPO day, it ultimately got acquired and I made a couple bucks.

It scratches an itch, and it feels good to see occasional but the fact is, doing it systematically or frequently, empirically speaking, YOU WILL ALMOST CERTAINLY LOSE. That’s why we do it the BH way.

I’ve recently started thinking about buying a lottery ticket once in a while - terrible investment, (the “stupidity tax”), but for $1-$5, feeling like there’s a possibility, however small, that you’ll be instantly filthy rich, it might be worth it.

My point: if you want that feeling, blow a couple bucks on pure speculation like lottery—not a couple percent of your portfolio on downtrodden sectors/stocks/ETFs. There are lots of people better then you at the latter, and they will beat you. But everyone playing the lottery is equally hopeless (and the profit generally goes to good things like schools, parks, etc) :D

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