Some Simple Investment Rules

Last week I mentioned change and cycles. I am not only an investor, but a musician. One thing I noticed as I got older was the march of digitalism. It was quite interesting following the development of the music industry. As a kid, my cousin and I used to go to auctions and bid for ancient record players. Nobody else wanted them, and we bought machines that were first manufactured in the nineteenth century. At one stage we had a rather intriguing collection, including a machine which would record sounds.

As time went on the technology improved, and that also brought prices down.

That leads us to a very important issue. In a technological world the natural financial order is for deflation. As techniques improve it becomes easier and cheaper to produce goods and services, so money should go further.

A quick example: I bought a chainsaw some years ago. it cost me €149. Some blighter stole it so ten years later I had to replace it. The replacement cost me €99.

Twenty years ago the cost of equipment to keep my swimming pool clear and usable cost in excess of €10,000. Today I keep my pool clean courtesy of a small machine that cost me €249.

In the modern world the opposite happens because of the horrors that come with debt. Debt makes things more expensive because of the carry cost of money.

The music industry taught me that a great change was coming. Up until the eighties everything was analog, then it started to go digital. At the same time the whole music industry was turned on its head, and I realised that computers were at last able to do what we expected them to eventually do back in the fifties. What did this do? It started to change the way the world worked. From the eighties onwards one could not go wrong by investing in the digital world.

Let’s move forward a couple of decades. Like most people I was uninterested in bitcoin when it first burst upon the world, but five or six years later it was clear that something intriguing was going on, and those who were paying attention started to buy in. Long term subscribers to my blogs will know I suggested £5,000 invested in bitcoin would pay for your pension. Not one, but two issues of my tipsiest The Big Pension said go out and buy. Bitcoin back then was selling for $282. You could say I was late to the party. It was 2015. That would have bought you twenty bitcoin. That is now worth well over to $2 million.

What is the next technology, built on top of digital structures? Blockchains. I cant effectively devote even a whole blog to this technology. It will change our world, and everybody should either be invested, or looking to invest.

Blockchains can run government institutions with staff levels cut to about 5% of where they are today, saving tax payers huge amounts of money. They can even turn political representation back to being fully democratic, close to the original Greek example. When fully implemented blockchain technology will change the way we live. That means, investing in this new technology will make you money in the future. It’s the place to be.

I have written a whole series of blogs about AI. That is about to drastically change our lives in rather alarming ways. Here is the link to the first instalment of a four part mini series about AI:

Although currently the AI scene is like the Wild West. It is only for those who really know what they are doing. There is one huge problem with AI. Let’s go back a bit and think in terms of money and energy.

Back in the fifties no-one was interested in buying a computer because they didn’t work very well. They were huge, and they had no storage capacity, so they couldn’t do much, and they took a long time to do it. My first computer bought in the eighties had a memory capability of just a couple of kilobytes. My current computer, which is nowhere near top of the range has a memory capacity of 8 gigabytes.

AI only works reasonably well these days because it has access to huge quantities of data housed in massive data centres. As its power and usage increases so will the demand for more and more power. With green ideas well to the fore these days, where is that energy coming from?

I’m sure that problem can be solved eventually, but we are currently up against a serious energy problem, and that is acutely so in Europe.

I’m sticking with certain blockchain technologies for the moment. But I am also invested in gold, and I do mean gold, not paper contracts. I think investing in AI is risky.

And it cant have escaped those paying attention that western currencies are heading down the drain. Another reason for holding assets in digital currencies, preferably bitcoin, but there is a snag there. You can no longer buy low. I stopped buying bitcoin when the price hit $2,000.

Foolish? Not so. I buy low. Once the price went above $2,000 I considered the price was no longer low. Let me explain.

As an investor I try to always invest in asymmetric deals. That may sound odd, but it is a simple and obvious way to value deals. A technology has to be viable and useful in order to develop and catch on, and therefore make money. If someone puts together a viable product that people are going to want, and you pay a small sum for it (buy low), then you should have an asymmetric bet.

I dont like using the term bet, because it has been hijacked by gamblers. Gamblers always expect to win. Investors invest against a wall of worry. A bet is made expecting a good payoff. Usually an investment is only made when the investor has emotionally written off the funds. ‘What can I do with my winnings?’ is replaced with ‘Will I still be alright if I lose?’

Look at it this way. My latest investment was in a company that is building a business that I want to use myself so I will invest in it. I can buy in when the price is pennies. It was nine pence when I bought. Let’s say I invest £1,000. And to make the maths easier, let’s pretend I bought at 10 pence.

If, as I expect, the company in ten years time may well be trading at £5 a token or maybe even a lot more, my investment will be worth £50,000+. If it only doubles, I will not have lost anything. If it crashes to nothing I have only lost £1,000. Set the possible gain against the possible loss and you have a nice asymmetric equation. That’s the kind I like.

Wait for the asset to get traction, and you have failed to buy low. Bitcoin bought at $2,820 as opposed to bitcoin bought at $282 gives a seriously depleted asymmetry. I was right to stop buying.

What I am now going to do is park my bitcoin into this new company and get the 7% interest it is paying if the money is deposited into a liquidity fund. That figure is well below what I usually get on my investments, but with bitcoin rising at the same time my real return is likely to be much higher. Why just get the rise in the price of bitcoin when I can get 7% on the parked capital as well? i’m happy with that.

From where I’m sitting, that is the way to invest. Go with the big new technologies and as they develop so will your investment. At the same time pay attention to the financial disasters, and hedge against them. Western currencies are in serious danger of collapse. Get into the safe havens of gold and bitcoin, although you should have bought bitcoin when I first suggested. Gold is also no longer cheap, but that is why I am invested in part of the refining process which is backed by the security of real gold. An alternative would be to invest in gold mining shares, but do your due diligence on the company.

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