A good friend of mine was so badly burned in the 2008 stock market crash that he swore off investing forever. Then, with dismay and regret, he sat on the sidelines watching the great bull market of 2009-2021.
He decided Coinbase’s IPO was the right time to get back in the game: “This was my chance to get in on an IPO like the big boys,” he told me. He bought at the market open, around $381, and was feeling good as COIN climbed towards $430 later that day. It’s been downhill from there, with COIN sitting around $304 as I write this.
Now he feels burned all over again: “This damn market. I never should have gotten involved again!”
My friend’s story is far from an isolated case. And whatever your experience, I’m sure you can relate to the strong feelings!
In my early days as a trader, I’d literally sit with my finger hovering over the buy button thinking, “As soon as I click buy, this is going to tank.” I actually believed that I could personally move markets!
Folks, this kind of thinking is nuts. What markets do is not personal. But they can bring up powerful emotions, and we have to learn how to deal with and manage them.
The Coinbase IPO (technically it was a Direct Listing) gives us a great opportunity to explore this challenge through the lens of the RISK Rituals.
REST
Stop and breathe. Be intentional. Make sure that you know what you’re risking and what you expect to gain. And make sure that you really want to do this!
I like Coinbase. I’ve been a customer of Coinbase for years, and I’ve had a positive experience.
I’m not alone. Coinbase has been a major onramp to the cryptocurrency and blockchain revolution, and now boasts nearly 56-million verified accounts. Moreover, Coinbase is actually profitable. Anyone who has tried to get paying customers for a new business knows how hard that is. This fact alone puts Coinbase in rarefied company.
Also, I care about privacy and the sovereignty of individual investors. It’s important to me that Coinbase’s revenue model is straightforward. Its customers pay transparent transaction fees, because Coinbase simplifies the complex world of cryptocurrencies for them. Contrast this with the confusing, small-print “payment for order flow” revenues that underlie the business model of brokers like Robinhood.
It didn’t take much of a Rest for me to conclude that I want to invest in COIN.
INVEST
Ok. You’ve decided you’re ready to invest. Jump. But not without your parachute, which is your exit plan.
When it came time to make my plan (remember we don’t buy anything without an exit plan) I wasn’t thinking about the price of COIN or what the company might be worth. IPOs are notoriously difficult to invest in. There are so many different influences that drive price when a company goes public.
What I did consider was COIN’s volatility and how it will fit in with my current portfolio. I fully expect COIN’s stock price to go up and down … for a while. It’s just what IPOs do right out of the gate.
Take a look at 5 big IPOs over the last few years. If you’d bought each of these on day one, you’d have been seasick by the end of the first year:
I need to sleep at night. So I made two choices: what my maximum position will be, and the price at which I’m ready to get in the game. When it hits that price, I’ll buy 25% of my full position. This way, I won’t lie awake regretting that I missed out, worrying about how much I’ll lose, or kicking myself for paying too much.
And I decided COIN would be an all-or-nothing bet. I expect highs and lows. With a stop loss, there’s a good chance I’ll be out. I want to be in for the long haul. That means that my position needs to be relatively small so that if something catastrophic happens with COIN, it won’t be the end of the world for my portfolio.
Do you see what I’m doing? I’m managing risk. Remember what Jack Schwager said about the greatest investors (aka the Market Wizards): the ONE thing they all have in common is a rigorous commitment to risk management.
STICK
Stick to it. Stay the course. Execute. You are the rare individual who actually has a plan and knows what you’re doing. Get the job done!
This step will be a lot harder if you tie your mood to COIN’s dollar value. At 10 am it’s up, and you’re elated. At noon it’s even, and you’re nervous. Now it’s 3 pm, it’s down, and you’re inconsolable. That sounds miserable to me. It’s no way to live.
I know I’ll be experiencing some potential lows in exchange for some potential highs. Because I believe in Coinbase and the future of blockchain, I’m investing in it. And that helps me Stick to the plan and maybe even enjoy the ride.
KEEP
Keep your gains. You earned them! Even a loss can be a gain once you accept the fact that those who do step up to the plate have to be willing to strike out.
Ninety percent of risk management is knowing when to get out before you get in. If you’ve planned well, then you already know what to do next. When you hit your time horizon or your price goal, it’s time to walk away.
For a big asymmetric bet like Coinbase, I’m looking to sell half my position at a big gain of at least 5x if not 10x and let the rest ride. You’ve got to have a big payoff when you’re willing to take the risk of something going to zero.
Sound investing is more than knowing whether you should buy the latest hot stock. It’s about knowing what your risk tolerance is, believing in your investments, and understanding how they work together. Coinbase is hot right now, there’s no denying that. It’s going to be a long road. Only you can decide whether you want to walk down it.
To my volatile buddy out there – and to all of us brave enough to enter the arena of capitalism – it’s never too late to read a little poetry:
If you can keep your head when all about you
Are losing theirs and blaming it on you …