by Dr. Chad Nash & Paul Moore
Are you jealous that you’ve missed out on bitcoin so far? Thinking about jumping in?
There’s some bitcoin investment advice going around in circles of people my age. And I admit, some of them are mildly successful . That’s an understatement, actually.
“You’ve gotta buy bitcoin!”
I’ve had quite a few friends go down this path in the past year, and I’ve tried to ignore it. But when two of my friends decided to sink all of their time, talents, and treasures into cryptocurrencies, I had to take a look. For an in-depth summary of cryptocurreny, take a look at this website.
One of my friends first heard about bitcoin in 2010.
“If I would have invested just $500 in it then, it would be worth well over a billion dollars today!”
This is certainly compelling. Check out this chart:
It’s honestly hard to not be jealous of those who caught this trend early on. And it is tempting to jump into this investment class.
But wait. Is this really a sound investment strategy? Or a speculative swing for the fences?
Sound Investment? Or Vegas Crap Shoot?As an entrepreneur and someone who has been interested in investing for years (with the occasional itch to gamble), I’ve come to delineate investing and speculating a bit differently than some. Here’s my loose definition for the purpose of this discussion:
Investing: If you’ve done a thorough evaluation, and you’re reasonably sure your principal is safe… and you have a chance to make a profit… you are investing.
Speculating: If you are “investing” in an asset that has uncertain protection of principal… and you have a chance to make a profit… you are speculating.
A sound investment operation is one which, upon thorough evaluation, increases the probability of a safety of principal and an adequate return. Operations not meeting these requirements are purely speculative.
Paul Samuelson, first American winner of Nobel Prize in economic sciences (my undergraduate degree), said: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
It sounds like I’m being pretty hard on speculators. That’s actually not my intent. It’s fine to speculate. As long as you’re clear that is what you are doing. I interact with a lot of successful investors, however, and most of them avoid speculation like the plague. It’s one of their key criteria.
Well, Chad, How Do I Know if Bitcoin is Investing or Speculating?
I’m glad you asked. It really comes down to analyzing the risk versus the return. Thankfully, someone has quantified that for us. Nobel Prize winner William F. Sharpe came up with a formula to quantify the return versus the risk of an asset class in 1966. It was later called The Sharpe Ratio. The Sharpe Ratio is the average return per unit of volatility: A numeric representation of the return divided by the risk.
An investor who can accurately foretell the future can ignore this ratio. He or she would be better off picking the next Snapchat or cryptocurrency, finishing off a few years in corporate America, then retiring to Maui. (<<
Assuming you are not in this class of prophetic investors, you’d best be cognizant of both the risk and return of your investment.
So what does the Sharpe Ratio tell us about the various major asset classes? Take a look:
Real estate investing typically revolves around multifamily housing units. So when I saw these figures, I wanted to know exactly how multifamily stacked up against the other asset classes in this chart. The numbers say that multifamily and retail are:
I also located the following graph to show how all commercial real estate compares with other asset classes. In keeping with our theme of low risk and high return, your goal here would be to be as high and far to the left as possible. Check this out:
This chart shows that core commercial real estate has by far the best risk-adjusted returns of the major asset classes. This analysis applies to all commercial core real estate (office, retail, industrial, and multifamily). For those of you who invest in gold, silver, and other precious metals, check out the miserable showing by commodities.
Maybe you’re investing in Bitcoin now, and choosing to ignore me… I understand (I know my good friend Bubba Aragon is cursing me to death, if he is reading this lol). I hope you’ll take a moment to yell at me in the comments section if so (shameless plug for increased post bumps).
So, where would bitcoin and other cryptocurrencies fall on this chart? If we charted bitcoin, it would be off the chart on the return side. And off the chart on the risk side as well.
If You Could Plot the Return on the Lottery, it Would Probably Be Similar.
And if that’s what you want to invest in, GO FOR IT!
Like I said, if you would have invested your pocket change in Bitcoin back in 2010, you could be independently wealthy now. I, for one, don’t like investing speculating that way. Been there, done that.
For further evidence, I just noticed that the price of Bitcoin dropped below $10,000 within the past week. The last time the price was this low on bitcoin was at the end of November, early December 2017 (when I first began writing this piece). I researched the news to see what could cause such a precipitous drop, now and at the end of last year.
It turns out that some anticipated plans to alter its underlying technology were scrapped. That’s all.
Wait… that caused a 21% drop in value in November/December of 2017?
Then the value, errr I mean the price, went up 40% the a couple of weeks later?
If you want to invest in an asset that is that volatile, be my guest. I am personally content to ride this one out. (I’ve missed out on lots of lottery winnings as well, so no sweat off my back).
Jordan Belfort, immortalized as The Wolf of Wall Street had some strong comments about cryptocurrency launches. He told The Financial Times, “It’s the biggest scam ever, such a huge, gigantic scam that’s going to blow up in so many people’s faces. It’s far worse than anything I was ever doing.” JP Morgan Chief Executive Jaimie Dimon said, “If we had a trader who traded bitcoin, I’d fire him in a second for two reasons,” he said. “One, it’s against our rules. Two, it’s stupid.” He added that it was “a fraud” and “worse than tulip bulbs,” referring to the famous market bubble from the 1600s. “It won’t end well. Someone is going to get killed.”
Dimon’s comments came within a day after Britain’s city watchdog warned investors to only take part in cryptocurrency fundraisings if they were prepared to lose all of their invested capital.
Dimon’s remarks sparked a 23% drop in bitcoin price in the next 48 hours.
Can you imagine any comment… by any person… causing your real estate portfolio to drop 23% in 48 hours?????
Furthermore China (yeah, the same China who is projected to be the next global leader in the market) has recently stifled the trading of bitcoins, imposing very strict limits on cryptocurrency. Bitcoin supporters may argue, that is EXACTLY WHY YOU SHOULD INVEST IN BITCOIN…I like to look at the signs and think a bit more logically.
I could blather on and on about this. And let’s be honest. I could find negative comments about investing in real estate as well. But the the main question still goes back to risk versus return. As one of my favorite rappers Young Jeezy once said, “The numbers don’t lie.”
And there’s another important distinction between real estate and commoditized investments like bitcoin, stocks, bonds, metals, etc: You can often influence or even control many of the factors that will lead to the success of your real estate portfolio.
You’ve heard of forced appreciation, right? No? Okay…
Forced appreciation is a way to make strategic changes to your real estate portfolio to drive increased income and value. It’s real and it’s powerful. It’s a cornerstone of many multifamily/commercial investing strategies.
Could you do this investing in bitcoin or other investments? Not a chance.
I’ll use the following example as an illustration. A mentor of mine was $2.5 million in debt when the real estate market turned against him in 2008. Not a happy place to be. But after a lot of prayer and hard work, he was debt free using a forced appreciation strategy. He would not have had the opportunity to pull out of this hole if he had invested in most other asset classes, that were more volatile or less liquidable. Because his debt was tied to real estate, he was able to sell off his assets more quickly.
So I guess you have to ask yourself… what is your “investment strategy”?
Are you rolling the dice and hoping for that once-in-a-lifetime grand slam? Or are you serious about building your wealth through time tested methods with a proven track record? I leave you with the words of two of the most influential and wealthy individuals who have walked this earth:
Warren Buffett: “Only buy something you would be happy to own if the market shut down for 10 years.” And, “Our favorite holding period is forever.”
King Solomon: “Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.”
I would argue that investing in real estate provides an ideal opportunity to fulfill the advice of these great sages. And I’m not alone. Multitudes of real estate investors feel the same.
If you want to learn more about getting started in real estate investing, or building your real estate portfolio, give me a shout. 303.359.9229 or firstname.lastname@example.org. I know a TON of experts who are much more smarter than me on the subject (Adam Hebener, I’m virtually looking at you!) who I would be happy to connect you with!