Investor Letter #002

In December 2017, Charlie Munger gave a speech at the University of Michigan's Ross School of Business. Bitcoin was trading near all-time highs, and naturally some of the conversation covered Charlie's hatred of Bitcoin.

In his discussion there was a nugget of gold that I think is particularly relevant to investors today.

Below is a short snippet of Charlie's talk (emphasis mine):

"There's a whole lot of things that aren't going to work for you. Figure out what they are and avoid them like the plague and one of them is Bitcoin. And the worst thing would happen if you won because then you'd do it again."

Looking back, Charlie Munger was spot on. The only thing worse than buying Bitcoin in December 2017 was trying to repeat the success of Bitcoin and "do it again" by buying various altcoins. Those who did ended up losing well over 90% of their wealth in 2018 and 2019.

While Charlie Munger may never come around on Bitcoin, he has mastered human psychology.

Go back to his quote above, and replace the word Bitcoin with Dogecoin. Or Gamestop. You'll quickly see how timeless Munger's assessment of human misjudgement really is.

Dogecoin investors won big in the last couple weeks, and their incredible success has emboldened them to buy up Safemoon, Telcoin, and hundreds of other cryptocurrencies with no users, cash flow, or sustainable ecosystems. All for a chance to "do it again" and repeat their success.

A few months earlier, GameStop holders took their winnings to AMC, Blackberry, and other heavily shorted stocks to cash in on another rally.

Time and time again, the follow-on rallies never have the same impact as the first, and instead of chasing after second, third, and fourth rallies, the best course of action is to typically ignore them entirely.

All the 'meme stocks' of early 2021 have spent the last month slowly trending down towards their historical price levels, and I suspect all of the rallies in long-forgotten shitcoins will have the same outcome.

My biggest takeaway from Munger's comment is to recognize that everyone thinks they're a great investor because everything is going up. Coinbase and Robinhood have been on top of the US App Store leaderboard all week, ahead of TikTok, YouTube, and Instagram.

It seems like everyone is on high alert for the next big thing, and most won't get what they're looking for.

If there was ever a time to turn off your phone and stick to your investing strategy, it is this moment right now.

My Writing This Week

This week I wrote about the promise of synthetic stocks, and did an analysis of the growth in institutional Bitcoin holdings so far this year.

Synthetic Stocks
To a casual observer, stocks appear to be a purely digital phenomenon.Brokerages all have apps for making trades online, and shares can be bought andsold in an instant. Although the user experience is nearly flawless on apps like Robinhood or CashApp, much of the underlying infrastructure that e…
Tracking Institutional Bitcoin Adoption
Michael Saylor’s decision to move MicroStrategy’s treasury into Bitcoin lastAugust set off a wave of Bitcoin enthusiasm among institutional investors, and 8months later, the enthusiasm hasn’t let up. Dozens of institutions - public companies, private companies, hedge funds, andeven insurance fir…

I'm working on a similar analysis of institutional Ethereum holdings, and I will share my findings with subscribers early next week.

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