‘Just a question, do you know much about Ripple?’
I received that text message on 30 December 2017 from my 31-year-old niece.
‘I know enough to know I wouldn’t touch it with a barge pole. But if you’re silly enough to believe this hype, then only invest what you can afford to lose.’
On 30 December, ripple was trading around US$2.20.
A week later, it was US$3.50…a gain of 60%.
If she had ignored the advice of her ‘fuddy duddy’ uncle, my niece could have made a tidy gain…on the proviso that she had sold.
However, novice (and not-so-novice) investors rarely do; 60% this week…what’s on offer next week?
Greed messes with your head. Dollar signs cloud your judgement.
Since hitting US$3.50 two weeks ago, ripple has fallen 60% in value, to US$1.40.
Over the course of three weeks — that’s considered ‘long term’ in the crypto world — ripple is down 36% in price (I chose the word ‘price’ instead of ‘value’ because there is precious little value in this stuff in my view).
Normally, a fall of this size would have greed’s emotional counterparty — fear — running loose in people’s top paddock.
‘Buy the dip’ is the automated response these days.
We’ve been programmed to believe that the market is a one-way trip to wealth.
The occasional dip in price is to be viewed as a temporary lull in proceedings…a great time to invest more in [insert your asset of poison in this space — shares, property, cryptos, etc.].
When Alan Greenspan backstopped the markets in the late 1980s with the Greenspan Put, he put in motion a conditioning process. Over the past 30 years, investors have become accustomed to the Fed pulling out all stops (in increasingly larger amounts and for longer periods) to initially support and then promote asset prices.
Buy the dip is a powerful belief
Even my investment-learner niece has been gripped by this belief.
This is the text I received from her on Saturday….
‘Should I buy Ripple now that the price has fallen 60%?’
My reply: ‘Don’t be stupid. This is just a stay of execution. Ripple is still headed for the gallows.’
The problem with the buy-the-dip mentality is that people do not understand maths.
Just because something has fallen 50% in price doesn’t necessarily mean it’s suddenly valuable and can’t suffer further falls.
In the days before the Bank of Japan (BoJ) became an active investor in the Japanese share market, the Nikkei provided a powerful counter-argument to ‘buy the dip’.
In 1990, the Nikkei peaked close to 40,000 points. Over the course of the next decade, the index fell 50% in value, hovering above and below the 20,000-point level.
Then, from 2000 to 2003, it fell a further 60%…from 20,000 to 8,000 points.
Source: Yahoo Finance
[Click to enlarge]
From peak to trough — a period of 13 years — the market suffered two significant downturns…50% followed by 60%.
An investor that endured the ride from peak to trough lost 80%.
The buy-the-dip investor, who invested after the initial 50% hit, still suffered a 60% loss.
Even the investor with perfect timing — buying at the 2003 bottom — went on one hell of a ride. Nearly a decade later, the index was still languishing around the 8,000-point mark.
Then came the now expected central bank intervention. From Bloomberg on 17 July 2017:
‘The BOJ owned about 71 percent of all shares in Japan-listed ETFs at the end of June , according to a Bloomberg analysis of data from the central bank…’
And this from The Australian on 14 January 2018:
‘The Bank of Japan, after boosting Japanese share prices with a $US50-billion-a-year ($63bn) program of stock purchases…’
Since mid-2012 — thanks to the Japanese version of the ‘Greenspan Put’ — the Nikkei has risen by 150%.
But what happens if or when the central bankers are unable to provide enough financial doping to lift the index from the horizontal to the vertical?
We could then see an initial 50% fall followed by an even bigger one.
The same fate awaits for crypto investors
In the coming years, I have little doubt that crypto investors who believed the ‘buy the dip’ bulldust will see a fall of 50%, followed by another 50%, followed by another 50%…and on and on it goes until they’re sitting on losses of 95–100%.
The same maths will apply to stocks like Tesla and the other cash-burning tech darlings.
The journey to near oblivion will be a saw-toothed one. Rarely does an overhyped asset fall in a straight line. There are always true believers that think the worst is over, assuming they are buying a bargain…
When in fact they’re buying a ticket to tear up another 50% of their hard-earned cash.
The worst is only over when practically no one believes the worst is over. That’s the potential time to buy…depending upon the particular investment.
If it’s an index like the ASX 200, you know it cannot lose all its value…so there will be a bottom from which to recover.
Whereas things like cryptos and those overhyped tech cash-burners can turn your money to vapour…zero. You can buy the dip after a 50% fall in price but still lose 100% of your money.
The buy-the-dip mentality is so ingrained into the investor psyche that it can only mean we’re getting close to a major reversal. When nearly everyone believes the same market myth, it’s a sign the herd is heading to the slaughterhouse.
After three decades of conditioning, the herd won’t accept its fate easily. It’ll take several big falls over a matter of months and/or years before they realise ‘buy the dip’ was nothing more than doubling down on a losing bet.
A 50% reduction in price is not necessarily a bargain…you can still lose another 50% or even 100% from that perceived discounted level.
This lesson is downside risk management is one that many investors are going to pay a very high price to learn.
If you want to avoid your capital and retirement dreams being taken to the slaughterhouse, please go here.
Editor, The Gowdie Letter