Saturday, January 13, 2018

A Few Win A Lot, A Lot Win Few

Most scams and cons are based on one basic principle - take a little bit from everyone, which amounts to a huge pile for the con-artist.

There are over 300 million people in the United States today.   If you could somehow get a dollar from each one of them, well, you'd have a third of a billion dollars.   Nice idea - now you just need to figure out how to get that dollar.

People don't miss small amounts of money, so it is easy to con them out of small amounts and they don't notice.   But you, as the con-man, reap huge rewards, as multiplied times the population of the USA, it adds up to a lot of money.

A reader writes that they bought some "ripple" (not the wine) as a means of "investing" in the crypto-currency craze.  "I can afford to gamble on it!" he says, "I might lose it all, but it might go up 500%!"

This are not the thoughts of an investor, but a gambler.   I only hope it does go up in value and he sells out before it crashes - because as we have seen, these crypto-currencies, having no real inherent value, tend to crash in a matter of hours or minutes, and then it is too late then to get out.  And all it takes is for one currency to crash to take down the greater crypto-currency market.

Regulation of these currencies seems in the cards - China and South Korea are already reining in the wild-west of Crypto-currencies.   The IRS will surely be next.  No government is going to allow a shadow financial system to exist whose only purpose is to consummate illegal transactions and avoid taxes.   And there are no legitimate uses for crypto-currencies these days.  No one accepts them, and for the most part, the transaction fees are staggering, particularly for Bitcoin.

In order to succeed, a crypto-currency would have to be easier and cheaper to use than Visa and Mastercard, and it should be traceable and trackable by government entities, if criminal activity is involved.   Until that happens, it is just a fad, not an "investment."   Oh, and Visa and Mastercard are not going to sit idly by and see their business plan destroyed.  Either they will lower their rates or come up with some competing block-chain solution.

But pardon me if I ask a relevant question:  If the purpose of these "currencies" is to move money across borders, why do they need to be currencies at all?    Seems to me the main idea of using block-chain for monetary transactions does not require some limited and unregulated currency to be created.  But that's just me asking the "dumb question" that will be readily dismissed by the crypto-faithful (but probably gets right to the point).

Getting back to our gambler, this attitude ("I can afford to gamble") is the key as to why these "currencies" have taken off like a rocket.   And yes, in the past, I used the same "logic" to "invest" (gamble) in the market.  As I noted before, "Market Cap" is a mythical number representing only what the last man in paid in terms of share price.   The financial press loves it (taking the share price x number of shares) as it comes up with impossibly big numbers.   But it means nothing.

It does illustrate that the last man in paid way too much for his investment, though.  And we've seen this time and time again.   One reason I was able to retire relatively early (so long as health insurance is affordable!) is that I sold out of the Real Estate Market before it crashed.   Sure, I could have doubled my money further if I had stayed in another year or so - or lost it all, if my timing was off.  That right there is the problem with bubbles - timing them.   And crypto is a bubble - and the question is, when do you get out?

It is hard to fathom, as you might make a profit and think, "I should get out while the getting is good!" but another part of you says, "Why bail now?  We made money at this, we'll make more!" and that is why people stay in and ride bubbles all the way down.

Again, the little people lose their "small" investment of only a few thousand dollars, which to them was probably a lot of money.   The guy who was the founder of the IPO company or who mined bitcoins five years ago, he's got nothing in the game.   Even at pennies-on-the-dollar he's still ahead.  And likely he sold some of his stock/coin/gold/whatever to the small chump investor along the way to pay for his new house and Ferrari.

That's all you are doing, as a small Johnny-come-lately investor in an IPO or other hyped investment - you are making someone else fabulously rich, and making yourself a little poorer.

Could you "win" at these kind of "investments"?  Sure, on occasion, they let some little chump win, to keep the other chumps investing.   I was lucky I got out of the Real Estate nightmare when I did.  I didn't get out of stocks when they crashed (but fortunately, being invested in profit-making and dividend-paying companies, most of my investments recovered quickly).

I noted before that back in 1989, all my friends were "investing" in Real Estate.  When the market crashed, they lost their shirts.  In 1995, when prices were down and I was buying, they were "investing" in dot-com stocks.   They lost their shirts again and bought real estate - exactly the same time I was selling it.  "You should stay in!" they said, "it can go nowhere but up!"   But frankly, when I saw properties selling for 2-3 times what I paid for them, I got out, and it was smart to do.

Where are those friends today?   They got caught up in the IPO frenzy of the 2000's - and then lost their shirts again.   Then they bought gold - another sure thing that I was an "idiot" for not getting into.   I am sure now, they are in bitcoin - and will lose their shirts again.   They certainly have a lot of shirts in their closet.   The reality is, most lose a little (except for the real estate thing, when they went bankrupt).   Some of these folks have been to bankruptcy court more than once.   Most are heavily in debt, which is why they play these long-shots - convinced their "ship will come in" and they will be able to pay off their debts that way.

And the one thing I have learned over the decades - you can't tell them squat.   And I have no desire to, either.  They are going to keep driving their car off a cliff.   I just make sure I am not in the back seat when they do.