Bitcoin – Portfolio Management – Are You a Strong Hand?

Overview:

The fork is now behind us, yet the drama continues.  There is not much to do in this market until we receive some transparency.  Trading is a pure gambler’s market right now, and participating runs the risk of capital erosion.  It also provides the opportunity to maybe pick up some coins that are being sold off because of the surrounding noise.  Trading and investing are two different strategies.  A market ripe for investing may not be ripe for trading and vice versa, however the mentality is the same.  Strong hands make money period!

Comment:

One of the recent comments received from a follower pertained to an article where we mentioned “we can afford to hold it to $0 which is what makes us a strong hand”.  His response was “great portfolio management tip”.  Fair comment, it is understandable that you do not want to ride your portfolio to zero.  But that is not what is being implied.

Let’s take for example Uber, Amazon, Facebook or Cannabis stocks.  Those that invested in these startups as initial investors came in with the mentality that their investment could simply go to zero.  These are high risk ventures and for every one Amazon there are at least 9 failures.  This is exactly why risky ventures are regulated by the SEC through accredited investors.

Accredited Investors:

An accredited investor is someone, or an entity, that understands the risks of investing in speculative equities.  Apple is a regulated company that must file with the SEC as part of public disclosure.  Other companies, such as Don’s smart goggles (for example) are private companies and not required to file public statements.

The intent of the SEC is to protect the average investor from investing in a private offering for which they really have not means to evaluate.  To qualify as an accredited investor the SEC verifies that these individuals or entities are financially stable, implying some financial savvy. These types of investors often participate in private placement where the there is a high risk of losing their entire investment.  

Do you think that those investing in Uber, Amazon or Facebook early on did not understand they could lose their entire investment?  They also understood these types of investments, though risky, can be very profitable.  If they invest into ten companies, many are likely to go to zero, and only 1 or 2 will actually pay off.

The payoff from the 1 or 2 that succeed will exceed the losses from the others.  This is why the SEC regulates this space.  If you are not a strong hand, and can not afford to ride a startup venture to zero, you simply are not allowed to invest.  This is to prevent the general public from gambling.

In simple words, the SEC is protecting those without the means of riding an investment to zero, from irresponsibly investing and potential bankruptcy.  

Wealth Management:

We can break wealth management down into three sub categories. Asset Management, Portfolio Management and Risk Management.

Asset Management is a broad perspective to investing, and one’s wealth may consist of real estate, metals, stocks, bonds, and or cryptos.  These various assets make up a wealth management portfolio.  Within any of these assets class one may have a real estate, stock, or a crypto portfolio.  This is where each asset class is managed individually.

Portfolio Management:

I have multiple portfolios and handle every portfolio individually.  These are also separated into sub portfolios within equity classes such as stocks and cryptos.  I have both a trading and investing allocation in each of these asset classes.  Each portfolio has a specific amount of cash allocated to it.  I do not mix portfolios nor do I mix capital.  In simple words, I do not use capital from my long term crypto portfolio to trade cryptos and vice versa. 

Trading Portfolio:

This is an amount of money I have allocated to trading.  There are five rules I have with my trading portfolio:

  • Capital preservation (Stops are used period, I do not cry over losses)
  • Never allow a swing trade to become a position or investment.
  • Stick to the plan, do not deviate and lower stops, or raise targets because of greed or fear.  Adjustments are fine if based on technicals.  Fundamentals do not matter.
  • Take the money and run! (If I am up, and the chart starts to weaken I get out)
  • Use leverage responsibly (more on this later) 
Investing Portfolio:

Within each type of portfolio is a variety of equities that provide some diversification.  In the stock market I am diversified in various sectors, such as oil, retail, tech, and industrial.  My long term portfolio consists of DE, XOM, WMT, MPC, JNJ, MMM, GE and BA.  I also own a few other positions like AMD, CGC, NBEV which I am looking for a broader move so we consider these longer term position trades.  (Recently I closed my Apple and Cisco positions).

I have a much smaller (% of total assets) portfolio of cryptos.  Very small less then 5% of my total assets.  Within that portfolio I have the usual suspects of BTC, BCH, ETH, LTC, etc.  The point here is that even if my entire crypto portfolio goes to zero, my ASSets do NOT.  This leads to what really what separates strong from weak hands.  Risk Management that provides a mental edge.

Mental Edge:

If your mentality is “I can NOT ride this to zero”, then your risk management and investing psyche is setting you up for losses.  I remember back in the day before cupcakes ruled sports, the sign on the wall in our locker room, “Give 110% Today!!”.  From a physics perspective this is impossible.  It was there to put you in the mental state of mind before each practice or game day.

So when we mention “we are willing and able to ride this to zero”, it does not imply we are just throwing money at an investment and hoping.  The intent is to remind us of the mentality we must have each and every time we take a risky position.  If I am looking at buying NBEV, I understand this can go to zero.  I also understand that it is a highly volatile stock and is going to fluctuate greatly.  My mentality is I can ride this to zero and I am fine with this.  Why you ask?

Highly speculative equities can go from 110 to 5 then to 1900.  I’m kidding right?  Nope this is exactly what Amazon did from 2001 to 2018 and those that had the mentality to hold through the FUD, were not scared of zero, and even added through the selloff were paid off in the long term.  

If you do not have this perspective and mental psyche, you will never succeed. You must have the mental fortitude first.  Ask any professional sports player, it is the mental aspect of the game that separates winners from losers.  They show no fear, and are willing to take a hit.  You think Ron Gronkowski or Gordie Howe worried about taking a hit?

Investing is no different and often I use the term “stepping in front of the train”.  In a market selloff I often will step in with a small position.  Yet these are not all in moves.  This is where risk management comes into play.   

Risk Management:

If you have the mentality of “ohh I can NOT ride this to zero it will devastate my livelihood”, you are simply a weak hand.  If you invested all your savings in Bitcoin, and may need the money in the next 3-5 year, you are not only a weak hand, but exercising poor risk management skills.

You manage a portfolio by assessing each equity and it’s potential downside.  For example I can pretty much guarantee that in the next 10 years JNJ, BA, MMM, WMT and or CSCO are not going to zero.  For this reason I risk more of my capital to these equities.

I can not say the same thing about BCH.  Heck with the drama surrounding the fork it could be zero next week.  So do I sellout because I am scared it might go to zero?  Well there is an equal possibility this is just a bunch of FUD and it rallies back 10 $2400 over by Dec 2019 too.

Same with Bitcoin, sure it could go to zero but it could also retest 20k by late next year.  This is a risk I am willing and able to take.  The potential payoff is greater then the risk.

So stepping in front of the JNJ market selloff is a little different then stepping in front of a Bitcoin selloff.  One must weigh the risks, and allocate an appropriate amount of capital accordingly depending on the equity.  With Bitcoin I come in with the assumption it is going to zero unlike JNJ which has a 60+ year history of continual dividend increases.

Weak Hand:

A weak hand has the mentality of, “ohhh gosh, I can not afford to ride this to zero, it’s my entire life savings.  This will have you selling into lows, and buying into highs.  Strong hands buy into lows, because they are risk oriented.

So there is a balance of no fear and understanding risks.  Take playing poker.  You do not go to the table on a Friday night with your paycheck when rent is due the following week.  This is gambling, no different then trading Bitcoin with monies you may need in the next 2-3 years.  However, if you decide to allocate $1000 for poker, do you sit at the 5/10 table with the entire $1000?  No you take $100 and sit at the 1-2 table.

You have put yourself in a position that you are not scared to lose.  If you lose with pocket aces in one all in, it is only 10% of your stack.  You can live to play another day. This is the proper risk management, be it poker, trading or investing.  

Of course there are some with mental toughness, but have poor money management skills.  We all know that guy at the table who will call with crap cards, and just does not care.  There is a balance of having the mental toughness, as well as understanding money and risk management

Money Flow:

Money flows from the weak to the strong.  This does not just happen in markets, it happens in life.  This is why the JP Morgans, Carnegie’s and Rothschild’s were so successful.  It was Baron Rothschild who is credited with the saying “the time to buy is when there’s blood in the streets, even if the blood is your own.”  This separates the strong from the hopeful.  A perfect example of this was NVDA Friday.

NVDA:

Going into earnings the market was positioning for a beat and rally.  Buyers of Calls outpaced buyers of Puts which is generally indicative of speculators guessing the stock rallies after earnings.  Typical crowded trade.  Even one of the largest trade publishers put out a Covered Collar strategy going into earnings.  Nothing like paying $3000 a year for this information only for them to tell you to close the position for a huge loss after earnings. Again weak hands buy the fear of missing out, the strong patiently wait, and buy on the fear of losing as the herd exits their long positions.

We also want to own NVDA, but the long trade was crowded.  This implies from the start upside is limited.  After earnings the stock was hammered.  The herd simply exited the trade.  As best in breed, we took the opportunity to Write DEC PUTs.  We receive the stock we are fine with it, if we are not assigned we keep the premium.

The point is, we are not fazed by the moves, and not scared to allocate monies into a position we believe is the right one, especially as the herd exits stage left.   We assume with every options trade (using our options strategy) that we will be assigned the stock period.  Because this is our psychology, we are not going to get scared out of the trade.  If it dips to 130 so be it, goes to 120 we are fine.

We have the means to wait out the storm, in the best in breed chip maker, in our opinion.  This is not a one part strategy, we have various plans to execute depending on how the stock reacts and or whether we get assigned or not etc.

AMD:

In fairness and for transparency we were Short Puts going into AMD earnings, and were assigned the shares at 26 plus the 1.40 premium so our average cost is 24.60. However the day of earnings I was very clear to our premium members and stated, holding into earnings is risky and if you do not have the stomach to take the pain of AMD pulling back to 17-20 then close the position now.

We understood prior to earnings the risks, and since this is a longer term options strategy we were willing to hold.  Not everyone has the stomach for shorter term pain so we made it clear there was the potential for a selloff after earnings.   For those of you interested in options we did our first intro to basic options on our radio show today.  We will post it shortly and this is one of a multi part series.

So what about Bitcoin?

BTCUSD:

Again the chart looks ugly, and this is not a bullish sign, nor is there any sign that it turns bullish in the near term.  However there are some signs of strong hands buying here.

The tails on the daily candles are long, which is indicative that strong hands bought into the selloff.  Money transfers from weak to strong hands, not the opposite.  As I mentioned above, strong hands are willing and able to step in front of the train and buy from weak hands.   This does not mean we can’t go lower here.  Keep in mind larger traders are accumulating 10’s of thousands of coins not a couple hundred, they buy over time and cost average in.  They take advantage of scared markets even though the current chart implies we are likely to retest 5200 and as I mentioned yesterday 4750 is now in play.

Because Bitcoin makes up a small % of my overall assets, I am not worried.  I will simply just ride out the storm.  Having been through numerous market corrections, I have realized that just holding my ground is the best thing to do.  Now if I thought from a fundamental standpoint Bitcoin was dead I would just close out and move on, but I believe Bitcoin is going higher in the long term.  In nearly 20 years of investing and trading, I have come to realize that buying bottoms and selling tops is a liars game.  Nobody knows where the bottom is, and same goes with the top.

Speculating:

Remember the current market price represents an equal amount of buyers and sellers.  The buyers think it is going higher, the sellers think it is going lower.  Current pricing represents all news and events that are known and unknown currently.  Unless you have a crystal ball, or a Delorean that can take you to the future, you are simply speculating.  This is why all markets are speculative  So how do we position?

I look at it this way, is Bitcoin closer to a bottom, or closer to a top?  Likely we are closer to the bottom.  If Bitcoin pulls back to $4000 that is 20% lower, however we are nearly 400% from the previous top.  So if you believe we eventually retest 20k, why wouldn’t you add a little here.  I say a little because again it comes down to risk management.  I had a buddy of mine the other day go “Boy Bitcoin looks bad, I want to buy but I’m scared it might go lower”.

OK this is a guy that is retired 3x’s over, and I said to him, “brother why don’t you just throw a few hundred bucks in goes lower throw a few hundred more in”.  It all comes down to risk management and being a strong hand.  I can afford $600 and so can he.  So I added a little at 6100 and 5600 done.  I’m not worried and I can wait out the noise for a return of the bull market.

NBEV:

New Age Beverage is one of the stocks we have added to our cannabis portfolio as our premium members can attest to.  We are using both direct purchase and stock options to accumulate shares.   This is one company that has a great CEO (IMO) and is positioning itself for future growth or even a potential takeover.

Yet the company lost money last quarter, so this is a high risk investment.  The funds I am allocating are money I am willing and able to lose entirely.  Goes to zero, so be it, the payoff is great compared to the risk, but this is a fraction of my account here.  It is a potential takeover target, great branding etc.  So I weighed the risk to reward and allocated a very small percentage of my assets to this equity.

We receive a lot of questions on what to invest into for the long term.  Well this is not an easy question to answer as everyone is in a different situation when it comes to money, so here are some basics.

Investing:

Before you invest in anything you should be free and clear of debt (with the exception of a house payment) and have at least 6 months to a year of money saved for hard times.  The last thing you want to do is have to sell stock or assets to pay your mortgage.  Most people lose their job during a recession when the stock market is down.  Now that 10k you put in the market is worth 5k and your cashing it out to pay bills.  Try and get your house paid off as soon as possible.  I know this isn’t possible in every case but this should be a goal.

Once you have your safety net in place there are several ways to invest.  Buy blue-chips dividend kings, add monthly and hold long term.  This is a great technique that younger investors should especially partake on.  That dividend investment or compounding interest adds up over a few decades.  A 1500 investment in JNJ when I graduated High School is now worth over 175k today and pays about 5k a year in dividends.  This is without adding another penny.  Imagine what you would have if I added $25 a week to this.  This should be the backbone of your asset portfolio.

ETF’s

You can also just buy the S&P through ETF’s.  Most fund managers do not outperform the S&P on a constant basis, it is made up of 500 or so companies, and if it goes to zero, Houston we have a problem which is why we own gold and silver.

Only a small percentage of your investment should be in high risk equities like Bitcoin and or cannabis stocks.  Long term is long term, and nothing better than getting a $8k dividend check every quarter at retirement.  Of course the younger you are the more risk you can take.  However have an investment strategy and plan, do not just shoot from the hip.

What not to invest into?  New Cars, Starbucks coffee, eating out too often, or any asset that is going to depreciate period.  I still do not own a new car, and though I look, when it comes to pulling 20-30k out of my pocket, I just can’t bear the pain.  That is lost money, if you are worried about Bitcoin going to zero, these types of discretionary spending sprees are the quickest way to a zero portfolio. 

Summary:

This is the first in portfolio management since many of the respondents from our recent survey wanted us to focus on this more. We will go into each aspect of portfolio management more in depth moving forward.

Bottom line, what makes you a strong hand is not putting yourself in a position that any one loss in an asset would affect your lifestyle.  If gold went to $800 next week, it simply is sitting in my safety deposit box; it does not affect my lifestyle if it does, I can simply wait out the market.  If the stock market pulls back 30-40% next month, I can still go to dinner, buy that Harley I am looking at, and pay my bills.

Same with Bitcoin, if my entire crypto portfolio went to zero, sure it would hurt, but it would not affect my lifestyle.  If you want to play like the big boys, the accredited investors, you must have the same mentality.  Ask yourself are you able and willing to ride a speculative investment to zero?  This is what separates the strong from the weak hands!

8 Responses
  1. Евгений Иванцов

    Привет с России !!! Супер статья !!!
    Как у нас в России про этого автора статьи-можно сказать * ЧЕЛОВЕК С ЖЕЛЕЗНЫМИ ЯЙЦАМИ !!! *

  2. brendan11

    Hi Andrew, I’ve been following you and Mark since last Aug on Trading View and more recently on SC. Signed up today for Swing Trades. Thanks many times over for your cogent analysis.
    Re above article. Can I ask what you use to manage your multiple portfolios, Sub portfolios etc between Trading and Investing styles, Stocks, Forex and Crypto. I use CoinTracking for Crypto and various spreadsheets for everything else – its messy and now that I’m full time trading I need a better system. Before I spend the next week trying to put together a spreadsheet that will record and monitor open and past trades and sum profit and loss across different portfolio’s and instruments is there anything available that you recommend to do the job? Thanks Brendan. PS Happy to take this thread offline – copy sent to info@sc

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