About Risk, Return, Time
DISCLAIMER: The information contained in this newsletter is for informational purposes only and should not be considered financial or investment advice. Any opinions expressed in this newsletter are solely mine.
This article details my reflection on my performance in the month of March. Enjoy. Also, sorry for no narrative newsletter this week; Fell sick, and am still feeling pretty bad rn.
Get-rich-quick schemes usually have a standard one-liner: “Buy this low-risk junk, for an insane RETURN, immediately”.
3 Factors -
Risk
Return
Time
These are the 3 core factors that make up an excellent asset. Bonds are low risk, low return - depending on the bond duration, they’re not suitable products for the typical degenerate trader. On the other hand, crypto assets are highly volatile, with the potential for asymmetric returns on a lower time frame.
About Risk
The overall risk in crypto assets is highly skewed towards the downside on a large enough sample size - given, say, 100 random coins, how many trend to zero on a higher time frame?
Of course, prudent risk management and application of probabilistic thinking greatly reverse the curve - with the potential of infinite downside comes the potential of limitless (not really) upside.
Point is - crypto is extremely risky. Alts, even more so. But play your cards just right and you can take advantage of this - as someone with a small enough bankroll, one of my mistakes in recent weeks was perhaps focusing too much on majors.
I’m pretty sure most of you have seen some sort of tweet talking about how to make it at different portfolio sizes - it goes something like this:
4-5 figs: shitcoins
5-6 figs: low cap alts
6-7 figs: majors / larger cap alts
Intuitively, the smaller you are the more effort you have to put into hunting that 100x, and the greater your exposure to risk (rugs, plain bad prices, quick “down to zero” movements). The larger you are, the less liquidity there is in hunting small caps, but also you might want to tone down your risk tolerance. You don’t have to “spend that much making much more”.
And so, my reflection for the month of March is that I need to be more attentive to the risk that I’m taking - by focusing on the moves of majors versus smaller cap projects with higher upside, I’m not being as capital efficient for my current bankroll size as I can be.
In fact, I should be spending more time hunting for lower-cap alts, and focusing on major movements on singular mid-large caps instead of breaking them down into multiple positions.
There’s a lot of nuance in the above statements that I won’t unpack, though. Factors such as bankroll size, risk tolerance, and portfolio management are topics lengthy enough for an article of their own.
About Return
Besides being a function of the risk you take (higher risk generally connotates to higher returns), the core function of return that I want to focus on is sizing. A good friend of mine in Hong Kong especially likes to emphasize the point of being able to size up - entering a 10x early doesn’t matter if you put in 0.01% of your portfolio.
As such, the lesson I’ve learnt in this regard is to instead focus less on multiple positions and size up on the core assets. Owning lots of different things ultimately creates underperformance and also increases the capacity to make more mistakes; something that I used to preach but I’ve since had to relearn.
Again, lots of nuances and stuff that I’m not unpacking - different people think differently; these are just my reflections for my own portfolio. Read, but don’t follow it blindly.
About Time
The length of time you hold an asset shouldn’t just be considered from the one-dimensional point of view of your thesis - e.g your thesis is “ETH is generational wealth in a decade, so I should hold for a decade”.
Time comes in the form of opportunity cost. Sure, you can put in 100k in ETH now, and wait a decade - but what if a better-performing asset comes along? What’s the most capital-efficient play?
The advice I received was this:
Sell even if the asset is undervalued / at a loss if you think you can be more capital efficient
Seems pretty “duh”, at face value, but I find that most people would not actually do this. Would you sell your “ETH Stack” in favour of using it to outperform in the short term if an alt cycle ever arises?
Concluding Thoughts
These are my reflections from the month of March. The last thing I want to touch on is patience.
Think of the market as a balloon. In the bull market, the balloon is full of air - you want to wring as much air out of it as possible. But in a bear market, the balloon is now deflated - yet people still seem to be putting the same effort into wringing as much air out of it as possible.
When circumstances change, it’s important for investors to understand what the effort : return ratio looks like; and so, I believe that most people would be better off just doing nothing in low volatility conditions (myself included).
What market cap do you consider to be low cap? 1~20m?