By Kris Sayce, editor, Casey Daily Dispatch
I kick myself for not understanding [crypto].
– Billionaire hedge fund manager, Bill Ackman
Will you kick yourself for not understanding crypto?
Will you look back, five or 10 years from now, and regret that you didn’t pay closer attention?
That you didn’t bother to figure it out…
Even the basics.
Many will. Many, like Ackman, already do.
Here’s the thing, there’s no rule that says you have to understand crypto or any other type of investment before investing in it.
The idea that you have to understand an investment is a myth.
But isn’t that reckless… irresponsible? No. Here’s why…
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Nick Giambruno and Dave Forest. And from the founder of our business, Doug Casey.
Today, we’ll explain how many investors miss out on some of the market’s biggest trends… simply for believing they have to understand an investment before taking the plunge.
It’s OK to Invest in Something You Don’t Understand
If you take the view that you need to understand something before you invest in it, you’re not alone.
Based on the quote we printed at the top of this email, billionaire hedge fund manager Bill Ackman believes that.
Apparently, so does billionaire investor Warren Buffett. Supposedly, he once said “Never invest in a business you cannot understand.”
Although even Buffett seems to have softened that view these days. At Berkshire Hathaway’s (BRK-A) 2017 annual meeting (Buffett is chairman and CEO of the firm) he said he regretted not making a bigger effort to understand Google, and its parent company, Alphabet (GOOG).
In many ways… in fact, in most ways, it’s easy to understand why so many investors think they must understand a business before investing in it.
It’s because most investors invest the same way – by putting large amounts of their capital in relatively few stocks.
So if you’re investing that way, you darn well better make sure you understand the business. If you invest 10%, 15%, or more in a single stock, make sure you know what the company does… and how it fits into the industry.
Look, clearly it’s hard to fault Buffett’s approach overall. You don’t go from selling gumball machines as a kid in Omaha, Nebraska to at one point being the world’s richest person without knowing how to invest. (According to Forbes, Buffett is now the world’s ninth-richest person, worth $101.2 billion.)
But just because a system works for Buffett, doesn’t mean it will work for everyone. Buffett is different from most folks. He had a single-minded determination to achieve his investment goals. And he did it in the way that he thought was the best for him.
But most folks just don’t have that level of determination and obsession… or the time to do it. And there’s nothing wrong with that, either.
So what we’re saying is: if you don’t have the same personality as Buffett, it makes no sense to invest the same way… the belief that you must understand a business before investing in it isn’t for everyone.
There is an alternative.
The Casey “10 x 10” Approach to Investing
The alternative is what we call the Casey “10 x 10” Approach.
We’ve written on the subject before. The idea is simple. You divide your investable capital into about 10 groups. Each group represents a different investment idea.
Then, within each group, you spread your capital across approximately 10 separate investments. Here’s the important part. Each of these investments should be relatively high-risk, high-reward plays.
The type of investment that, if things pan out as you hope, could make you 10 times your money. Of course, that won’t happen with every investment. More than likely, of the 10 investments in each group, two or three will give you a big, triple-digit percentage return… three or four will make you decent double-digit returns… one or two may go nowhere or fall a small amount… and one, two, or three may go completely the wrong way.
But overall, the idea is that the combined returns will make you many times more than you could make with a more “conservative” approach.
Now, even though you’re investing small amounts in each play, shouldn’t you know at least something about the ideas? Sure. We’re not suggesting you throw your money around willy-nilly.
But fully understanding something, in our view, is just an excuse to not act. Take cryptocurrencies and the blockchain, for example. How many people really understand the whole thing? Not as many as you’d think.
But did that stop many investors taking the plunge? No. For three reasons…
Find a Trusted Resource
First, many people saw the big picture. They understood that this was new… generational.
If they waited until they fully understood how the whole thing worked, they’d miss out on the biggest opportunities.
Second, using the “10 x 10” Approach, you only invest relatively small amounts in each idea. So worst case, if the investments go wrong, you only have a small amount at risk in each play.
Third, if you don’t understand something fully, the next best alternative is to trust someone who does. Experts and analysts who do know the investment idea in detail.
You rely on their research… you trust them to take a complicated, complex, or new idea, and explain it to you in plain English.
Again, this doesn’t mean being irresponsible with the money you’ve worked hard to accumulate. It just means not missing potentially life-changing opportunities in areas that, admittedly, could be highly complex.
In short, don’t be the investor who regrets not acting on an exciting opportunity, just because you don’t fully grasp it. Find a trusted resource… someone who can help and guide you through the new idea.
Then, once you’ve reached the level where you’re comfortable to act, go for it. If you use the Casey “10 x 10” Approach to investing, it should make that decision so much easier.
Try it out.
Editor, Casey Daily Dispatch
P.S. As we mentioned in the essay, a great example of this is crypto. Bill Ackman says he regrets not understanding it more. There are millions of other investors out there who think the same way… and they’ll probably never do anything about it.
Maybe they’ve just never found that “trusted” resource to help them.
The good news is that chief analyst Nick Giambruno does understand it. He understands the good and the bad. And what’s more, he’s taken the time to look not only at Bitcoin and other cryptos, but also at the niche industries that play a vital role in the industry.
He recently released a fascinating presentation that puts all his research in one place… explaining it in a way that’s easy to understand, and which is easy for almost any investor to follow and to act on it. We highly recommend you check it out here.