Good evening everyone and welcome back to 0toFreedom. Today I am going to explain how to protect your cash from market bubbles. I managed to pull out of both the bitcoin bubble and the latest stock market downturn in December, which only seems to be getting worse day by day.
So first of all let me start by explaining what is a bubble. A bubble is an artificially inflating the price of a given asset. For example all the internet companies in 2000 ,the housing market of 2008 and the Bitcoin price until last December. The bubbles happen because of greed and pop because of fear. Everyone got too greedy in all of the above examples and then everyone started panicking thus the huge downturn in the prices. The bigger the greed is the bigger the downside is.
So lets first start with the whole cryptocurrency situation.We had Bitcoin all over the news, im sure you had a lot of friends talking about it and even people who have no clue were putting their money in it. Then we had Warren Buffet saying that this is not sustainable and will drop donw in price in a big way. People at the time of course said he is an old man who doesnt know what he is talking about. But after all he is not one of the richest guys in the world for no reason and soon after the price of bitcoin dropped from $20k to about $3.5k right now. That is a massive loss and I do not wish to anyone to experience this. Imagine you have saved $10,000 over the course of the year with a lot of hard work and decide to put them in bitcoin. Then a couple of months later you are left with a meager $1.5k and all the hard work has basically evaporated. And yes the price might go back up, but no one knows that for sure and you are basically starting with your savings from zero again. Not a fun situation and definetely people need to be careful.
So what happened during the time in the crypto bubble was that I started reading about crypto and I liked the idea. Didnt really know that much about it, but decided to put about 10% of my money into Litecoin as it was undervalued ,atleast so I thought. I put them in and in the next morning my money has doubled ! I couldnt believe it and thought that just like that I am going to start making money left and right. That was the greed in me talking and good enough that soon the mind took over. I thought about it for a while and made some more research. What I noticed is how the Bitcoin price chart looked incredibly the same as the Nasdaq during the peak of 2000. So I convinced myself that I need to be fearful when others are greedy and pulled out the money from the Litecoin with a decent return of a 100%. And a couple days later the prices started going down. Up until this days I still have some money in crypto which I bought with some of the winnings from Litecoin. Good enough that they are basically free money from the winnings so I have just left them there incase one day they make a comeback.
So what helped me in not putting more money in crypto and even making some profit :
1. I read the chart.
When you see a chart that is just parabolically high you should have a big red flag rising straight away. Of course there might be some exceptions but in general that seems to be the case. Most of those parabolic charts are caused on greed and of course pop on fear.
2. I listened to Warren Buffett.
This man is such a huge knowledge base for every investor out there and you can learn so much just from listening to him. So at first everyone was making fun of how he doesn’t know what he is talking about and all that. Then I checked something – the story in the year 2000 was pretty much the same. Warren’s Berkshire Hathaway has been lacking in performance compared to stocks like Yahoo or AOL. So everyone has been thinking that he doesn’t know what he is doing until the bubble popped. And of course everyone know his greatest quote which made him so much money in the stock market :
“Be fearful when others are greedy and greedy when others are fearful.” – Warren Buffet
I have been seeing the same signs in the stock market in the last year. People have been talking about Amazon stock to 2 or $3trln market cap and they accepted returns of 100+% a year as something normal from the likes of Amazon, Netflix or Nvidia. That is the air that inflates the bubbles – greed. Add in the mix the fact that a lot of companies have been taking on debt so that they can buy back their shares and inflate their prices artificially – greed again , this time from the CEOs. So now the the cheap debt is about to end and we are going to see the true face of these companies without the artificial buybacks and huge debts to pay for it. In my opinion that is going to cause the fear which is going to pop the bubble. Of course I might be wrong, but this approach has helped me to go out of the market just before the big seloff started. So in a year where the markets are down I managed to make 15% gain and pull out. I am going to go back in, but steadily month by month and I am going to stick with solid dividend companies.
So thats about it on how I managed to make money and most importantly not lose any during a big market falldown. To summarise the most important thing is not getting greedy and control your emotions. Getting rich in the stock market does not happen overnight so make sure you get some good old discipline and have a good look around you.
Thank you for your time and hope I have been useful to you. If you have any questions or suggestions don’t hesitate to drop a comment I am always happy to answer.