5 questions you need to ask yourself before buying Bitcoin

At the Sunrise Christmas party I was having a drink with one of our young studio floor crew who was constantly checking his smartphone and trading Bitcoin. I then had a drink with one of our wardrobe stylists who told me she was trading… a derivative of Bitcoin called Ethereum.

Alarm bells started to ring so I asked them a couple of simple questions;

What are they? “They’re a crypto currency”.

What does that mean? “I’m not sure.”

Who makes them? “Powerful computers”.

Who owns the computers? “No-one knows”.

Are they regulated? “No”

The alarm bells started to ring even louder.

Over the years we’ve seen a string of investment fads from avocado plantations and prawn farming to exotic futures contracts and collectibles.

We invest in start-ups and alternative investments so are pretty open minded about new trends. But these crypto currencies do worry us. They have all the signs of an investment bubble, and reports of people mortgaging their house to invest is just plain crazy.

Hey, if you can make big bucks investing in a fad… great. Just don’t be over exposed when a crash comes. Take profits along the way, try to get back your original investment and then just play with the profits.

Regular readers know we’re disciples of investment guru Warren Buffett who makes his decisions based on 5 simple criteria. So we thought we’d put crypto currencies (we’ll use Bitcoin as representing them) through the Buffett investment filter.

. Do I understand the business?

Bitcoins were invented by a mysterious computer genius called Satoshi Nakamoto who decided there would only be 21 million ever created.

Bitcoins are created or “mined” by super-computers which solve complex algorithms and, in return, receive a unit. The closer the number of Bitcoins gets to 21 million units the harder it is to mine and the bigger the supercomputers need to be to solve the puzzles.

The Bitcoins are then held in digital wallets of investors which are numbered and password protected. Some describe it as a peer-to-peer electronic cash system.

The Bitcoins are then traded on markets using “blockchain” technology. This is simply a decentralized network of computers around the world which monitor and record all transactions.

Even the Australian Stock Exchange is looking to replace its CHESS share trading platform with a blockchain system, so this technology is certainly getting into mainstream use.

Basically a Bitcoin is a means of trading value. Think of it as a digital version of money or before that shells or rum during the Rum Rebellion when Australia was an early colony. It’s used as a means to pay for good and services.

Its value is determined by good old supply and demand.

. Is it run by people I admire and trust?

Mmmm… no idea.

Crypto currencies started out on the “dark web” as the favoured currency of drug cartels and arms dealers. The reason is because it operates completely outside the control of governments, banking systems or regulatory authorities.

Everything is basically anonymous. Bitcoin miners and investors are completely anonymous.

As the price of Bitcoins has skyrocketed, mainstream investors have taken an interest to try and make profits.

Coin Base seems to the biggest Bitcoin exchange platform in Australia where you can buy and sell. But there are other exchanges like Etoro and AvaTrade.

. Does it have a sustainable competitive advantage?

While Bitcoin was the first, and best known, of the crypo currencies there are now a whole range of them… Ethereum, Dash, Ripple, LiteCoin, Monero.

As this crypto currency investment rage continues there is every likelihood the number of different alternatives will grow as well to meet that demand.

So while Bitcoin had the market to itself in the beginning from being the first mover, the supply will grow as competitors multiply.

. Is it the right price?

In July 2010 one Bitcoin was worth US8cents. By January this year it had risen to $US800. On December 18 it topped $US18,000.

No that’s not a typo. $US800-18,000 this year is correct.

As you’d expect that sort of return has attracted a fair bit of attention. The more investors wanting to compete for the limited number of tokens available means the price skyrockets.

Like all markets, the right price is what someone else is prepared to pay for it. But when this digital token has no underlying foundation of value it’s near impossible to work out whether it’s over or under valued.

It seems to simply be based on demand and supply. We’d suspect the more competitors are that are created, producing more supply, the heat will come out of the market.

. If yes to all the above then do the deal.

While we sort of understand how they work, we’d have to say the rest of the answers to the Buffett investment filter are all a no.

Yes there’s lots of money being made, and lots of people bragging about it, but our considered opinion is to be extremely careful. Only invest what you can afford to lose and certainly don’t take on debt to finance it.

Lets leave the final word to our corporate watchdog the Australian Securities and Investments Commission;

“ICOs are highly speculative investments, are mostly unregulated, and the chance of losing your investment is high. Consumers should understand the risks involved, including the potential for these products to be scams, before investing.”

Enough said.

7 traits that lead to bad investment decisions (and how to avoid them)

Success or failure when it comes to investing often comes down to our personal psychological traits, and the way we make decisions, rather than the actual quality of investments themselves.

It’s our state of mind, our emotional wellbeing and personal traits which can either help or hinder our decisionmaking. Just examine the way you “think” about investing and we bet you’ll be surprised by how you’re influenced by a range of different emotions, bias’ and experiences.

Some are good, but plenty are bad. Trying to rectify some of the more damaging traits can dramatically improve decisions and, hopefully, performance. How many of these are you guilty of?

1. Giving in to fear and greed

Investing can be scary… tensions can rise when markets unexpectedly gallop in either direction. Emotions cause you to flee a bear market or plunge head first into a bull market, acting directly counter to the investment adage of buying low and selling high.

Investment history shows that if we counter these emotions completely we’d be infinitely more successful investors. Counter cyclical investing is buying a quality asset which is undervalued in falling markets and selling when it becomes overvalued in rising markets.

It’s not trying to pick the very top of a boom cycle, but being happy to bank good profits and leave something left over for the next investor. Those fear and greed emotions are just so powerful but can be so destructive and often lead us into making irrational decisions.

2. Being overconfident

Making decisions about investing and making money needs confidence. But there is a line… and it’s a very sensitive line.

People with an inflated sense of their own ability to make smart investments often take shortcuts and don’t fully think decisions through. Having the discipline to do all the appropriate, thorough and objective, research before committing, no matter how confident you are, is critical.

All the legendary investors have been renowned for their research and the ability to not go ahead with an investment if its prospects didn’t match their study. It takes courage to overturn a decision when the facts just don’t stack up… but it can save a lot pain.

3. Looking backwards, not forwards

Investing is all about the future prospects of an asset. That it has a bright future and will provide good returns.

As the future is hard to predict we tend to look to the past for some guidance. That’s fair enough but many investors have a bad habit of dwelling on the past, and talking about market developments as if it was obvious what was going to happen.

The reality is that it’s never that obvious, and hindsight can be misleading. It’s better to focus on the current environment and some of the lead indicators providing a glimpse of the future.

The current residential property cycle is a classic case in point. A year ago historic data showed a booming market, particularly in Sydney, leading indicators were strongly predicting a slowdown.

4. Relying to heavily on past patterns

Technical analysis is studying historical market patterns and using them to try and predict the future. As seasoned investors know, making any kind of prediction is impossible.

Yes history is a valueable foundation for investing and determining the credentials of a stock or property. But tracking past price movements to build patterns to predict the future is just one tiny element of a complete assessment.

Fundamental real life aspects… such as trading environment, management, the state of the economy, skill of management etc… are extra layers which need to be added to the analysis.

5. Not admitting a mistake

Whether it be pride, hubris or stubbornness, there’s nothing worse than “marrying a dog”. An investment you were confident would succeed but hasn’t performed, been a disaster but you simply hang on hoping you’ll be eventually right.

As the losses mount you eventually sell but the financial damage could have been significantly less if you’d admitted the mistake and cut your losses.

Objectivity, and understanding you won’t be right all the time, is the key to success. Make the hard calls and move on.

6. Doing mental accounting

Investors often fool themselves into thinking that they’re doing better than they are. It’s human nature. So it’s important to keep track of how you’re doing on paper, not in your head.

It always amuses us, for example, when people talk about how much they make on property deal. When you gently ask them whether they’ve  deducted stamp duties, legal fees, agent’s commissions and council rates from the profit, the penny drops that the transaction costs are substantial.

Yes, profit is the difference betweeen a buying and selling price… but minus costs.

7. Constantly adapting

We all have a natural aversion to change that can get in the way of successful investing. In order to be successful, you need to be able to recognize when things aren’t working, and adapt accordingly.

Nothing ever stays the same. Investment cycles constantly change, politics constantly change as does regulations, management and financial circumstances. These can all provide opportunities but only to those who not only recognise the changes and are able to adapt.

We’re not talking about knee jerk reactions to sudden changes. It’s an ability to embrace an understanding of change and to think of it as an opportunity rather than a threat. Then to adapt an investment portfolio accordingly.

Introducing Kochie’s 4 Week Investment Makeover!

One of the most common things I hear from the Money Makeover community is that investing is too hard… or too risky… or only for rich people in pinstripe suits.

Let me tell you why that’s a dangerous attitude to have.

#1: While investing can be risky, not investing can be even worse


That’s because the purchasing power of money you keep in a bank or under the mattress is reduced each year thanks to inflation. In other words, you need to earn a return just to keep up with rising prices, or your money will get left behind.

#2: We are all investors, whether we like it or not


Not understanding investing means you don’t understand some of the most important assets you’ll ever own… for example, your investment property… or worse, your superannuation.

Ok, but I still don’t know anything about investments…


That’s fine, but it’s up to you to change that. I strongly believe that everyone has the power to invest wisely.

That’s why I’ve created Kochie’s 4 Week Investment Makeover, a new online course that will give you the knowledge and confidence you need to put your money to work and start building wealth.

Over four weeks, I will take the mystery out of investing and walk you through proven wealth-building strategies that anyone can put into practice. You’ll learn how to;

  • work out your risk profile and manage risk effectively
  • set an appropriate investment strategy
  • understand the sharemarket and how to invest in shares
  • choose appropriate managed funds and exchange traded funds
  • invest in property without over-stretching your budget, and;
  • how to set up your super for long-term success, work out if SMSFs are right for you and engage high quality financial professionals who won’t rip you off.

You’ll also receive expert insights into each topic, practical tasks to help you apply your new knowledge and access to our online community where you can get your questions answered.

If you’ve already completed Kochie’s 4 Week Money Makeover, or if you already have your day-to-day finances under control, then this course is the perfect next step.

The best part? If you don’t come out of this course feeling informed, confident and ready to invest, I will refund the course fee. There’s no risk to you.

If you’re ready to take the next step with your money, then you can find out more about Kochie’s 4 Week Investment Makeover by clicking the button below.

Learn more about Kochie’s Investment Makeover

4 investing lessons we can all learn from grand final footy

For sports nuts last week’s Grand Final weekend was footy heaven. When you looked at the teams involved across both AFL and NRL, there were traditional finals regulars the Sydney Swans and Melbourne Storm being challenged by the young gun disruptors the Western Bulldogs and Cronulla Sharks.

Despite the results, all four teams absolutely deserved to be challenging for the ultimate prize. Their success has been built around some key principles and strategies which you soon realise can be easily adopted by all of us in building a winning financial plan.

So we thought we’d move away from everyday finance this week to look at the four investing lessons to learn from successful football coaches.

 

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1. Stars can provide a foundation for consistent success


Just as the Buddy Franklins, Marcus Bontempelli’s, Cameron Smith’s and Paul Gallen’s turn up week after week and deliver consistently high quality performances, investors need to put quality investments at the core of their portfolio and build the rest of their portfolio around them.

That’s not to say you can throw darts at the board after that in the hope of landing the next Isaac Heeney, because speculating is a dangerous game in investing. However, if you do have quality investments at the foundation, the other potentially rising stars can complement them rather than be relied on to carry the portfolio’s performance.

2. Focus on the game in front of you


The old coaches’ cliché is to “take it one week at a time”. And while this sounds like a bit of a cop-out to avoid looking too far ahead, it’s a rock solid approach that carries weight in investing too.

As Doggies coach Luke Beveridge or Sharks coach Shane Flanagan will tell you, there’s not a lot of value in dwelling on the past or looking too far into the future, because to deliver your best performance you need to be completely focussed on the game in front of you.

The same goes for smart investing. Don’t anchor your investment decisions in the past… whether that’s the price you paid for something or the past performance of a company… because that information rarely matters. Instead, put your energy into making the best decision for the future based on the situation you’re in today.

3. Recruit coaches that complement your skill set


Just as every successful coach surrounds themselves with specialist assistant coaches in each facet of the game, every investor should leverage the expertise of people who know parts of the investing world better than them.

This is particularly important for casual investors, who often shy away from seeking professional advice, even when they’re unsure about an investment decision.

It might be paying for property inspections or getting the guidance of a sharp equities adviser, whatever the case, it’s crucial to recognise your strengths and weaknesses and use experts that complement your skill set.

And, if you can’t afford the very best financial coach, look for those who have worked for, and learnt from, the best. Luke Beveridge was an assistant coach to Hawthorn’s legendary Alistair Clarkson, as were current senior coaches Leon Cameron and Brendon Bolton.

4. Developing a style of play to suit your team


Similar to how Western Bulldogs and Melbourne Storm pursue a high tempo game to leverage their youth and the Swans kick a lot to take advantage of their great foot skills, you’ve got to find an investing style that suits you.

This means building a portfolio according to your risk profile, age and goals. Recognise how comfortable you are taking on risk, plan your investments to deliver the financial support you need at different stages of your life, and set firm goals to work toward and guide the way you invest.

Only once you’ve bedded down this profile and worked out an investing style that suits, should you pick up the financial footy.
We reckon we’ve become a better businessperson and investor for our short time being involved in the AFL, and hopefully taking on board a few of these lessons, you can become a better investor from football too.

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How to Supercharge Your Savings

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BUSTED: 5 Common Investing Myths

If your friends and relatives are anything like ours, they’re only too happy to share their financial wisdom with you. Whether they’re qualified to is another matter entirely.

In fact, we often notice the same clichés about investing popping up time and again, repeated like they’re gospel. Some make sense, or have at least elements of rationality. But others are just plain dangerous.

That’s why today we’re going to bust five of the most common myths we hear about investing, once and for all.

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1. You can’t go wrong with bricks and mortar


It’s easy to point to the current madness in Sydney and Melbourne as evidence that property is a one-way ticket to wealth. But it’s not that simple.

While prices in Sydney are up 15 per cent this year, over the last 10 years they’ve only risen by an average of 4.4 per cent, and have often tracked flat or downwards.

Many people also underestimate the costs of owning a property, especially with interest rates at record lows, and assume they’ll always be able to find a tenant and increase rents.

Finally, keep in mind that if all of your money is tied up in your home and an investment property, you’re highly exposed if the market does change course.

2. Negative gearing is a license to print money


This billion-dollar tax break gets a lot of bad press.

It’s billed as a tax wrought for the wealthy and the cause of our capital city house price problems, and yes, at some stage the government will probably have to address it.

But owning a negatively geared property doesn’t guarantee you’ll make money.

That’s because negative gearing provides a tax break for losses incurred when you borrow money to buy an investment (in this case the losses are your rental income minus your loan interest).

To make money on a negatively geared asset, the asset must appreciate in value enough to cover these losses and lock in a profit.

This is a great strategy in a rising property market. But remember what we said in point one…

3. I’m too young / broke to think about investing


It’s easy to think you’ll put off investing until you’re older, or some point in the future when you have money to spare.

But even setting aside a small amount each month can build big rewards over time thanks to the power of compounding. And the younger you start, the better.

For example, let’s say at age 25 Sarah deposits $2,000 into a high interest savings account and commits to kicking in $100 a week from then on.

Assuming she earns an average return of 5 per cent on this money compounding monthly, by the time Sarah is thinking about retirement aged 65 she’s a compound interest millionaire with $1,006,630 in the bank. And she’s only deposited $300,000 in cash. Magic.

4. Super will look after itself


Many Australian prefer to focus on the ‘now’ when it comes to their money and assume that everything will be ok in the long run.

But with people living longer, the government can’t afford to support our aging population in the same way as they did for previous generations.

Yes, you can’t touch it right now, but that doesn’t change the fact that how you invest your super is one of the most important financial decisions of your life.

So take the time to consolidate multiple accounts, understand the fees and choose an appropriate investment option for your situation.

5. Financial advisers are crooks


Fees and commissions paid to financial advisers are a sore point for many people.

But a good financial adviser can save you many times the cost of the fees they charge by making sure your money is appropriately invested and putting a plan in place to help you achieve your financial goals.

Knowledge is always your best investment. So if you don’t have it, buy it from someone who does.