The Most Important Question To Ask About Investing
The most crucial investing question isn’t “What are the highest returns that I can earn”, but it should be “What are the best returns I can sustain for the longest period of time?” It isn’t buying an asset in anticipation of a new all-time high, rather, it should be buying an asset hoping that it will have a higher low the longer you hold it. Time then becomes the exponent that does the heavy lifting; not a short-lived high risk high reward no pain no gain gameplay. It is definitely more fun attempting to squeeze every potential penny out of every opportunity we can find, and sooner than we realize, we’re taking on a ridiculous amount of risk that is often fueled with leverage.
We feel like a champion when we win, and we rationalize our mistakes when we lose.
I argue it is less about the money, and more about being right. It feels good to know that we’ve made a right call, and that someone else on the other end is supposedly losing to us. It feels great to be on an upward path. We feel unstoppable, until a flash crash happens. We don’t know that it will happen, in fact no one can predict when it will happen. Let’s take Silicon Valley Bank (SVB) as an example. The news media are stating that SVB’s downfall marks the worst bank failure since the 2008 financial crisis.
Could you have predicted that SVB would fail and result in a flash crash followed by USDC being depegged? Absolutely not!
SVB Financial bought tens of billions of dollars of seemingly safe assets, primarily longer-term U.S. Treasurys and government-backed mortgage securities. These were safe assets, and are at virtually no risk of defaulting. They pay fixed interest rates for many years, and everything feels like rainbow and butterflies for SVB. Plenty of startups and venture-capital firms look up to it. However, the recent rise in interest rate has moved so much higher than expected, that those securities bought are worth less on the open market than they are valued at on the bank’s books. As a result, SVB’s $128 billion securities portfolio (as of 2021) could only be sold at a loss.
The difference between the unrealized loss and the investments’ fair value jumped to more than $17 billion in 2023.
Furthermore, SVB’s deposit inflows turned to outflows as its clients burned cash and stopped getting new funds from public offerings. The bank attempts to sell $21 billion of its securities to reset its interest earnings at today’s higher yield, however following its announcement, its stock price fell hard and it is much more difficult to raise capital now. Often, when we say that we’re risk takers, we’re only taking into account what we can envision and stomach. But the truth is, this journey of investing is a constant chain of surprise, volatility, setback, and disappointment.
I refuse to believe that a large percentage of us are genuinely happy in spending an extensive amount of time looking at financial reports, the hottest news insights and candlesticks to gamble a portion of our wealth away.
At the end of the day, we all have our individual wants and needs. Some of us are after the high after we’ve correctly predicted the market’s direction. Some of us are after the flaunt and validation when someone else sees our so-called success. Then there are some of us who are really disinterested in knowing about our portfolio returns or benchmark. We only care about whether we have enough money to get a place of our own, to finance our children’s education and to keep travelling to amazing places with our family. When we spend some time understanding why we want to invest, we do not only gain knowledge and exposure to our investing styles, but it also informs us of the things and people we truly care about. What and who do you truly care about?
