Even if you’ve been through multiple bear markets, the next one may be completely different.
Morgan Housel is a partner at Collaborative Fund and a former columnist for The Wall Street Journal. He has twice won the Best Business Award from the American Business Editors and Reporters Association, has twice been a finalist for the Rob Award for Outstanding Business and Financial Journalism, and is also the author of the global bestseller The Psychology of Money.
In this interview, Morgan provides ten key recommendations for cryptocurrency investors. These recommendations cover specific investment strategies, and Morgan's insights are easy to understand and apply not only to the cryptocurrency market, but also to the broader investment field, making it a valuable resource for investors of all levels.
History repeats itself, inevitably
Morgan Housel firmly believes that market bubbles will still exist, whether it is 100 years from now or 200 years from now, just like the technology bubble and the real estate bubble in 1999. He pointed out that historical bubble events, whether 100 years ago or 200 years ago, have striking similarities.
Morgan explains that the reason history repeats itself is that humans consistently respond to greed, fear, risk, and uncertainty. Whether in finance, medicine, the military, or physics, people respond to these themes with remarkable consistency.
Morgan mentioned economist Hyman Minsky's "financial instability hypothesis," which states that if the market never experiences a recession, people will become overly optimistic, accumulate a lot of debt, and eventually lead to a recession. He emphasized that stability itself can lead to instability, and excessive stability can push the system toward instability.
Morgan pointed out that after every market crash or recession, people are always looking for someone to blame, but in fact, these are all part of the normal functioning of capitalist society. He believes that trying to eliminate market cycles will only make the situation worse.
While Morgan believes that it is nearly impossible to break this cycle as a society or industry, he also mentioned that there is hope on an individual level. Individuals can escape this cycle to some extent by recognizing these repetitive patterns and avoiding them in their own investments and decision-making.
Morgan stressed that if an investment can increase fivefold in a year, it is also possible to lose 80% of its value in a year. This is particularly evident in the crypto space, where sometimes an investment can increase tenfold in a year, but can also drop 80% to 90% in a year due to sporadic news, and some “junk coins” can even go completely to zero.
Morgan mentioned that many people first entered the crypto market in the middle of the bull market, mistakenly believing that the bull market would continue for a long time. However, they soon found themselves at the other end of the market cycle, entering a bear market and going through the entire process of the bear market. In this process, more than half of them will leave.
Morgan mentioned that in financial matters, if you can complete the sentence "I am an XX investor", then you have almost tied your identity to your investment style. In a bull market, people may think of themselves as smart or rich, but in a bear market, this identity may shift to "I am a loser" or "I am a poor person", and this close connection between identity and market fluctuations may cause harm to individuals.
Morgan quotes Harry Truman, noting that the next generation learns little from the previous one unless it experiences it firsthand. In financial matters, if you have never experienced a 50% decline, you may not truly understand the experience. Every bear market is unique, and even if you have experienced many, the next one may be completely different.
The psychological impact of exaggerated returns
Morgan mentioned that the market has a collective memory and is made up of the collective consciousness of its participants. Different market participants, depending on their age and experience, will react differently to the same events, and each generation will understand risk in its own unique way. For example, young adults who experienced the Great Depression may remain wary of financial markets for their entire lives, while those who were children during the Great Depression may have only heard these stories from their parents.
Morgan stressed that what people experience between the ages of 15 and 30 has a profound impact on their lives. At this stage, people's brains are still plastic, and they begin to take on social responsibilities, so the experiences of this period will profoundly affect their worldview. There are also differences in the understanding of financial views between different generations.
Morgan pointed out that in bull markets, people are often dissatisfied with their own gains because they are envious of others. He believes that this kind of envy is one of the main reasons for the bull market to get out of control. In addition, on some social media, people tend to exaggerate or even fabricate their own successes, which may lead to unrealistic expectations and envy in others.
Morgan believes that market cycles have become more rapid due to the influence of social media. This phenomenon is particularly evident in the crypto space, where market ups and downs can occur in a very short period of time.
Money, Happiness, and Personal Values
Morgan mentioned that in a bull market, especially in the cryptocurrency market, people often show off their wealth, which is particularly evident on social media. He pointed out that this behavior easily leads people to envy others instead of focusing on their own progress and achievements.
Morgan believes that while money can bring a certain level of happiness, it can only solve problems related to money. True happiness also includes healthy relationships, a good mental state, and a satisfying lifestyle.
Morgan also mentioned that successful people’s schedules often include a lot of unstructured free time. This seemingly inefficient schedule actually provides space for creative thinking and problem solving. In contrast, those who fill every minute with tasks often have no time for creative thinking.
Morgan quoted music producer Rick Rubin, noting that only after achieving their dreams do people realize they don't feel any different than they did before, which can lead to despair. He stressed that money doesn't completely change how a person feels about their life. Many people actually desire a simple, independent life, but they mistakenly pursue high status. Status is a game that can never be won because there will always be someone richer, prettier, or happier than you.
Morgan mentioned that many people may be billionaires in terms of assets, but they carry a "social debt" that exceeds these assets. This debt stems from the need to impress others and the desire to demonstrate one's identity and value, which Morgan described as a burden.
Morgan points out that money can be used in two ways: as a tool to improve personal happiness, and as a measure of how well others judge you. Many people mistakenly use money for the latter, as a scoreboard for others to judge their success. If people can reduce this need, they will be better able to use money to improve their own happiness.
The host said that when people see money as a tool to enhance their freedom, they have the healthiest relationship with money. Pursuing status is an exhausting game with no end, while seeing money as a tool can help people live better.
Morgan mentioned that the value of many consumer goods, such as cars and houses, is often misunderstood. For example, a high-end Toyota may actually be a better car than an entry-level BMW because it provides more driving comfort, not just bragging rights. Even essentially good people can make bad decisions when faced with huge monetary incentives.
Morgan emphasizes that monetary incentives can drive positive change as well as negative behavior. For example, during wars and recessions, technological innovation often accelerates due to pressing needs.
Investment strategy: medium-term balance, long-term vs short-term
Morgan mentioned that his own investment strategy is long-term regular investment. Regardless of whether the market is booming or sluggish, he will regularly invest the same amount into the same investment and plan to hold it for 50 years. He emphasized that this strategy can reduce the impact of emotions on investment behavior.
Morgan believes that long-term investment does not mean ignoring the short-term dynamics of the market. The long term is actually the accumulation of the short term, and investors need to experience and understand these short-term dynamics, even if their understanding is that some of the market's behavior is ridiculous.
In the crypto space, the emergence of new phenomena such as NFT and various emerging assets is an important part for content producers and investors. The emergence and disappearance of these new phenomena are part of the story and evolution of the crypto space. Morgan believes that investors can adopt different strategies. Some may choose to invest in large blue-chip stocks or crypto assets regularly, while others may prefer to trade and try new investment opportunities. He believes that both strategies can be healthy ways to invest.
Morgan points out that many stock market investors will put most of their money into long-term stable investments while keeping a small portion of their money for trading and trying new investment opportunities. This strategy satisfies their intellectual needs for investing, while also being fun.
The key to happiness: accepting imperfection
Morgan pointed out that in the investment field, effort is not always proportional to results. He believes that many investors misunderstand what they can control and ignore the importance of their own behavior. He mentioned that in a bull market, the best thing to do may be to do nothing, and the same is true in a bear market.
Morgan believes that in investing, striving for perfection (such as perfectly predicting market tops and bottoms) is often unrealistic. The market itself is full of uncertainty and unpredictability. If investors realize that their decisions may be imperfect, they are more likely to adopt conservative strategies, such as diversification, to reduce the potential negative impact of a single decision. If you always try to be perfect and efficient, you may suffer a lot in times of crisis.
Morgan believes that accepting imperfection means taking a long-term perspective. In the long run, market fluctuations and the imperfections of individual investment decisions will have less impact on overall investment performance. Accepting imperfection can also help investors avoid overreacting to short-term market fluctuations. Accepting imperfection is also part of psychological resilience. In the investment process, it is crucial to remain calm and objective, even in the face of losses or mistakes.
Morgan mentioned that learning from mistakes is an important part of the investment process. Accepting imperfection and learning from it can help investors make better decisions in the future. Accepting imperfection also means being adaptable. Changes in market conditions and personal circumstances may require investors to adjust their strategies rather than sticking with a perfect plan that may have become outdated or inapplicable.
Compete with yourself
Morgan stressed that in fields such as business, investing, and sports, allowing optimism and pessimism to coexist is the key to long-term success. He mentioned that for investors who are experiencing a complete crypto market cycle for the first time, they may tend to invest in cryptocurrencies with full optimism, hoping to experience this cycle from beginning to end.
Morgan mentioned that crypto investors may find their own "dumbbell strategy", which is not just a balance between traditional assets (such as cash or Treasury bonds) and crypto assets, but may also include investments in other hard assets such as real estate. This strategy can provide a certain safety net when the cryptocurrency market falls.
Morgan used Microsoft as an example to illustrate the characteristics of a successful entrepreneur: extreme optimism in technology and extreme conservatism in financial management. Bill Gates once said that since the day he founded Microsoft, he has always hoped to have enough cash in the bank to maintain a year's salary expenses in the case of zero income.
Although there may be many challenges and difficulties in the short term, if you can persevere, you may make huge progress in the long term. Morgan mentioned that in his own investment experience, the market has achieved significant growth over the long term despite the problems he often faced.
Morgan stressed the importance of applying these lessons throughout the market cycle. He believed that these lessons were especially valuable for those who were going through a full market cycle for the first time. If people’s expectations grew in tandem with their income, they would never be satisfied with their financial situation. He stressed that even those who were lucky enough to have a growing net worth and income would never be happy if they did not work to control their expectations.
Morgan advocates for being grateful for what you have and advises people to compare themselves not to others’ current situations but to their past situations. For example, most people are probably much better off now than they were five years ago, even if they may feel inferior when scrolling through social media.
The power of motivation
Morgan pointed out that incentives are an important driving force that influences people's behavior, whether in the crypto field or other fields, and understanding the incentives of a person or organization is crucial to predicting their behavior and decision-making.
Morgan pointed out that incentives in the short term may drive market behavior, but in the long run, true value and fundamentals will determine market performance. Market dynamics are often driven by different incentives of participants, which may include seeking quick profits, avoiding losses, or long-term investment.
Morgan mentioned that understanding incentives can help investors better assess risk. For example, if the market is dominated by investors seeking short-term profits, then the market may be more volatile and unstable.
Morgan advises investors to reflect on their motivations, such as financial goals, risk tolerance, and investment time horizon, to develop a more appropriate investment strategy. If a person’s primary motivation is capital preservation, then they may choose a more conservative investment strategy.
Morgan stressed that while markets can be swayed by various incentives in the short term, sticking to an investment strategy based on solid principles and understanding is generally more successful in the long run.
Manage your risks and don’t overdo it
Morgan stressed that investors often try to over-optimize their investment strategies, such as trying to accurately predict market tops and bottoms. However, this excessive effort is often unnecessary and can even be harmful. Accepting imperfection and having room for error is very important in investing. In a world full of uncertainty, the pursuit of perfection means no room for error, which can lead to serious consequences in times of crisis.
Morgan believes that a long-term perspective is more important than trying to accurately grasp market dynamics in the short term. He advocates a long-term investment and holding strategy rather than frequent trading and trying to predict short-term market movements. Investors should avoid overreacting to short-term market fluctuations. Market fluctuations are normal, and overreacting may lead to unnecessary transactions and additional costs.
Morgan points out that streamlining the decision-making process in investing can reduce errors and stress. For example, investing regularly (such as investing the same amount every month) can avoid the pressure of trying to buy or sell at the perfect time. Investors should develop patience and stress tolerance to cope with the unpredictability and volatility of the market.
Morgan stressed that successful investing often takes time, and frequent trading usually leads to higher costs and lower overall returns. Investors should maintain consistency in their strategies and avoid frequent adjustments to their portfolios due to short-term market fluctuations.
Understanding basic economic principles, market dynamics, and financial instruments can help investors make more informed decisions, focusing on long-term goals and the big picture. As market conditions and personal circumstances change, it is necessary to adjust investment strategies appropriately. The market has its natural ups and downs, and understanding these cycles can help investors better position their strategies.
Optimism and pessimism
Morgan believes that to achieve long-term success in investing, you need to have both an optimistic and a pessimistic mindset. Optimists believe in good returns in the long run, while pessimists are prepared for short-term difficulties. He advises being frugal like a pessimist and investing like an optimist.
Morgan mentioned that one of his favorite asset allocation strategies is the "dumbbell strategy," which is to maintain high liquidity and low debt on one end (a pessimistic short-term strategy) and long-term investment in stocks on the other end (an optimistic long-term strategy). He emphasized that there may be various challenges and surprises in the short term, but if you can stick to it, the rewards in the long run may be huge. Therefore, he recommends being cautious in the short term and optimistic in the long term.
Morgan stressed that it is very important to combine optimism and pessimism in a balanced way. Excessive optimism may lead to ignoring risks, while excessive pessimism may lead to missing opportunities. Optimism is an important driving force for investment and innovation. Optimists tend to see long-term growth potential and opportunities, which is a valuable perspective in investment.
At the same time, Morgan also emphasized the value of pessimism. Pessimism can be used as a risk management tool to help investors identify potential problems and challenges and make more prudent decisions. Many major advances in history have been driven by optimists, but they are also accompanied by warnings and balances from pessimists.
Morgan pointed out that market cycles affect investors' optimism and pessimism. In rising markets, optimism may dominate, while in falling markets, pessimism may be more prevalent. He suggested that individual investors consider their own optimistic and pessimistic tendencies when formulating investment strategies. Understanding their emotional tendencies can help formulate more balanced and suitable investment strategies.
Good things happen slowly, bad things happen quickly
Morgan argues that good things often come from compounding, which is an inherently slow process. In contrast, damage often results from single points of failure that often have immediate and catastrophic effects.
Good investment returns take time to build, and market declines or crises can occur in a very short period of time. Investors need to understand that building wealth is a long-term process and should not expect significant returns quickly.
Morgan noted that because negative events can happen quickly, investors need strategies to mitigate these risks, such as by diversifying investments or maintaining a certain amount of cash reserves. Market psychology plays an important role in this phenomenon. When the market panics, investors tend to react quickly, causing prices to fall sharply. Morgan reminded investors to learn from history and understand the cyclical and volatile nature of the market.
Morgan stressed that no matter how experienced an investor is, they should remain humble and open to new information. Markets are complex and unpredictable, and there is always something new to learn. Investment decisions are always made based on incomplete information, so understanding and accepting this uncertainty is a key part of successful investing.