Your questions… answered

Firstly, this will be the last time you hear from me at Exponential Investor.

As we’ve noted over the last couple of weeks, this publication is merging into our Fortune & Freedom publication.

That doesn’t mean you’ll stop hearing from me. I’ll still be putting together analysis and essays for you – but the next time you hear from me, I will be writing from Fortune & Freedom. You’ll also be hearing from other investment and economic experts to give you a clear picture of what really matters to investments, your wealth and your freedom.

For me though, I’m off to Sydney tomorrow to catch up with some family and friends. Then, I will be back here in the UK just a week and a half later. So… expect to hear again from me in mid-February.

For now, as a final contribution to Exponential Investor, I thought I’d answer a few questions that hit our inbox recently.

Your questions

This first question is one of the best I think we’ve received in recent times. It’s a short question but its importance can’t be overstated.

How long should you keep a trade open for if it’s not moving?

That’s a wonderful question. A lot of investors get stuck in a trap of thinking that, if a stock isn’t moving in the direction that they want, then it’s a dud. But that’s not necessarily the case. In fact, I’ve seen many stocks in my time boom, bust and boom again.

This is what volatility looks like, when a stock is up, down, and all over the place. This can lead investors to sell when they shouldn’t and buy when they shouldn’t. But then what happens if there’s no volatility and the stock isn’t really doing anything?

Again, this kind of action can be misleading as it can see investors get impatient and sell when they shouldn’t, or likewise it may make a stock look attractive, when perhaps it’s best left alone.

To figure out what to do in these situations you need to break things down to their most basic principles.

1. Why did you invest in the stock in the first place? Was it short-term capital growth? Long-term capital growth? Were you in it for the dividend yield? You need to revisit your original investment decision and ask yourself: is it a sound investment idea still?
2. This leads to your timeline. How long did you originally intend to be in the position? This is arguably the most crucial factor, because if you wanted to invest for 12 months in it, and for 12 months it’s done nothing, then perhaps it’s time to let it go. But if you were investing for five years and you’re a year in and its done nothing, then revert back to point 1. And if things haven’t changed, then perhaps you need to give yourself more time.
3. Is the company in a better or worse position than it was when you invested, and if worse, can it get better? If things are worse, and the outlook is stormy and the stock hasn’t moved, then you might be lucky to get out without much pain. But if things are better, and are on the improve, then perhaps the market hasn’t fully priced in the underlying value of the company: in that case, more patience is needed.

All in all, if a stock isn’t doing much, it’s not the end of the world: in fact, it could even present an opportunity in the right circumstances.

The next couple of questions relate to the crypto markets.

What does it mean to “hodl”?

“Hodl” is a crypto term that means simply to hold for the long term. We spoke about timeframes above with the first question. In fact, timeframe in crypto is also critical, in my view, to maximising your wealth potential.

To hodl is to hold your crypto investments through thick and thin. When the market is in the midst of a crypto “winter” it can be tempting to just exit stage left, sell it all up and make for the hills.

To hodl is to weather the storm, to hold your positions through these periods in anticipation of a bright day around the corner. I have personally lived through four crypto cycles now, and am anticipating a fifth, and sixth and likely more from there. Experience tells me that the best outcome has been to hodl for the long term.

A true hodler is someone that’s been around a while, seen the ups and downs and yet is still here, still hodling bags and still hodling belief in the potential of crypto markets long term.

What do I do about crypto taxes?

That is another good one, and particularly as it’s tax time of the year. If you’re looking for some handy software to track all your trades and investments, nothing is – dare I say it – a one-size-fits-all solution.

There are some good ones out there, such as Koinly. But, for my mind, the best thing to use is an Excel spreadsheet where you simply log your moves. Buy, sell, transfer, swap and staking rewards. Be sure to get it all down.

Also, get yourself a good accountant who’s up to speed (or at least willing to get up to speed) with the latest in tax rules and regulations in whichever domiciled you’re required to pay taxes. It will be worth the expense to get some assistance.

We also have plenty of detractors, people that still believe we’re lost in a fog of foolery when it comes to crypto.

Crypto is very similar to Covid jabs. Those who have had three or four jabs must keep telling themselves jabs are good and those who have bought crypto have to keep telling themselves it’ll go up soon. Gold has been money for 5,000 years. 

This is a perspective I’ve seen many times over. I think that it somewhat relates to the hodl question above. We keep telling ourselves it’ll go up soon because it does. But of course, not everything does. That’s the nature of the beast.

Also, not all cryptos are trying to be money. Not all are trying to be gold. Not all cryptos are the same. So I’m afraid if you think that gold is better than crypto, you’re missing a fundamental piece of understanding here. That’s like saying gold is better than stocks, or property, or wine, or bonds – you’re talking about two very different things with two very different purposes within a portfolio.

My new book, The Crypto Handbook (coming out in July this year… a shameless plug), may just help clear up any confusion on this score.

Until next time, with Fortune & Freedom,

Sam Volkering
Editor, Exponential Investor