The average investor is an emotional investor – making decisions based on feelings and hunches instead of rational thought. 2021 was the year of the emotional investor as the markets were flooded with the stimulus money of an investing public caught up in crypto and meme stock mania.
Enter FTX to take advantage of all the attention crypto was garnering in 2021 when Bitcoin, Ethereum, and other popular cryptocurrencies were all trading at historic highs. Behind aggressive marketing and celebrity endorsements, FTX became one of the largest crypto exchanges in three years, with a valuation of $32 billion.
Greed gripped the markets in 2021 as investors snatched up crypto and meme stocks without any thought of future prospects. The consensus among investors, pundits, and experts were that the only way to go was up for the markets.
While greed gripped investors in 2021, 2022 has been a different story, back to FTX. The once shining star of the crypto world has fallen quickly and sharply. The collapse of crypto in 2022 (Bitcoin is down more than 65% YTD) took its toll on FTX after a run on deposits last week left it with an $8 billion shortfall, forcing the firm to file for bankruptcy on Friday, November 11th.
FTX account holders first sensed trouble when FTX suspended withdrawals on November 8th. Imagine a bank suspending withdrawals. There would be panic on the streets.
The fallout from FTX’s collapse continues. This week, FTX CEO Sam Bankman-Fried, NFL quarterback Tom Brady, supermodel Gisele Bundchen, and comedian Larry David were named in a suit accusing them of defrauding investors who lost money in FTX’s sudden collapse.
A proposed class-action lawsuit filed in federal court in Florida late Tuesday names the four parties above, along with other athletes and entertainers, as defendants in the case. All promoted FTX before it declared bankruptcy on November 11th, with the company now under investigation for possible securities violations.
Merriam-Webster defines greed as “a selfish and excessive desire for more of something (such as money) than is needed.”
The problem with greed in investing is that money becomes the sole focus where there can never be enough of it. Investors who invest based on greed or emotions cloud their judgment and are prevented from making smart and rational investment decisions as emotions grip their decision-making.
Ultra-high-net-worth investors invest differently than everyone else, and one simple reason for their success separates them from the average investor. They have different investment objectives. While the average investor is focused solely on money and the big payoff, money is only a means to an end for UHNWIs. Their objectives are less selfish. Spending more time with family, leaving multigenerational wealth, and making the world a better place are the objectives of the UHNWI investor. Wealth is a means to these ends. Wealth isn’t the end.
With goals of achieving financial independence, spending more time with family and doing more good, and creating multigenerational wealth, savvy investors put emotions aside and invest more with their heads to rely on data, numbers, and fundamentals to achieve their objectives.
To achieve their goals, smart investors focus on assets that generate enough passive income to meet present needs while preserving assets and generating income for future generations. And the assets of choice for achieving these twin goals? Income-producing tangible assets like private real estate and investments in private companies (debt and equity) can generate income not only for the present but, when reinvested and combined with an appreciation of the underlying assets, can create and maintain income and wealth for generations to come.
By focusing on worthy objectives, smart investors take greed out of the equation and can make smart investing decisions.
In addition, by investing in long-term, illiquid assets, sophisticated investors prevent themselves from giving in to market hype and greed. While the average investor hangs on every word and post made by talking heads, influencers, and celebrities on cable news, the internet, and social media, smart investors keep their eye on the prize.
Tying their money up in private investments with long-term windows allows them to ignore short-term market developments and avoid following the herd. It’s how they can take greed out of their decision-making and make sound investment choices.