Posted by on Jun 19, 2017 in Articles & Advice, Blog, Columns, Featured |

Image Credit: Christophe Vorlet

By Jason Zweig |  June 16, 2017 11:08 am ET



When the asset that makes up more than two-thirds of his net worth lost almost 25% in a few hours this past week, Samuel Lee did the obvious thing: He took a nap.

Mr. Lee, 31 years old, runs SVRN Asset Management, a small investment-advisory firm in Chicago. In his own portfolio — but not for any of his clients — he holds more than 1,000 units of Ethereum, the cryptocurrency that is one of the most explosively volatile assets in the world right now.

Can a rational investor enter a wild market without losing his mind? A former exchange-traded-fund strategist at Morningstar, the investment-research firm, Mr. Lee is a respected blogger and commentator on financial markets who says he insists on building prudent, long-term portfolios for his clients — without a whiff of speculation.

I would never emulate Mr. Lee’s bet, and you shouldn’t either. But for people who feel they must speculate — in Ethereum or in any other wildly risky asset — Mr. Lee’s experience offers a roadmap of how to go about it.

Almost 70 years ago, the great investing analyst Benjamin Graham set out the greatest dangers in taking a flyer on a hot asset: “(1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.”

Mr. Graham added: “If you want to try your luck at it, put aside a portion — the smaller the better — of your capital in a separate fund for this purpose…. Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.”

Mr. Lee knows that passage almost by heart, and he fits it almost to a T.

He put only a “low single-digit percentage” of his net worth into Ethereum and expects to lose most or all of it. He paid an average of just over $25 for Ethereum tokens that are now worth more than $350 apiece and, at their peak earlier this past week, brushed $400.

Ask Mr. Lee whether Ethereum is a bubble, and he will say yes. Ask him if he knows what it is worth, how long he will own it or exactly what will make him sell it, and he will tell you he doesn’t know.

But he also thinks there’s a remote chance that Ethereum will go up by a lot more than the roughly 1,500% it has already gained since he bought a year ago. He puts those odds at about 5%.

There are already hundreds of competing cryptocurrencies, forms of digital money that may replace cash for some purposes, enabling confidential payments without cost or delay. Which — if any — will take off is almost impossible to predict.

Launched in 2014 by a Swiss nonprofit, Ethereum is based on a global network with a built-in programming language allowing any user to write contracts for ownership and transactions. Units of its common currency, or “ether,” are exchanged over the network.

“If I went by what common sense told me, I would have gotten out a long time ago,” says Mr. Lee. “I had to train myself into thinking, ‘If this is a bubble then the valuation will exceed what I think is reasonable by an incomprehensible amount.’”

And so it has. Ethereum’s total market value topped $30 billion this past week, making it worth about 15% more than SunTrust Banks, a regional-banking giant that generated more than $1.8 billion in net income last year.

Ethereum’s potential may be huge, but how do you value it? Merely a medium of exchange, it doesn’t produce any income. A rival cryptocurrency, Bitcoin, which this past week fell more than 25% from its recent high, may be falling out of favor; that could happen to Ethereum, too.

In fact, says Mr. Lee, “‘Ethereum’ is the perfect thing to call a bubble. It’s nothing, it’s just made out of ether.”

He wouldn’t touch it at these prices. “You want to buy when everybody thinks it’s insane,” he says, “not when it’s become sexy.”

But Mr. Lee isn’t ready to sell yet. History shows, he says, that bubbles last longer and inflate farther than most people expect, tending not to burst until they get much more popular than Ethereum has so far become.

So Mr. Lee is patiently holding an asset that most speculators trade in and out of at a ferocious pace. “When a speculative asset displays momentum,” he says, “it’s better not to cut it too soon.”

Of course, he isn’t the first person to take a ride on a rocket and be convinced he will know when to jump off.

As long ago as 1720, during the bubble in stock of the South Sea Co. on the London Stock Exchange, the Archbishop of Dublin warned that investors were “well aware” the company wouldn’t succeed, “but hope to sell before the price fall[s].” Almost all who had bought – including none other than Sir Isaac Newton — were wiped out.

Putting only a tiny amount of his initial wealth at risk, and regarding the entire venture as an all but certain loss, have enabled Mr. Lee to keep greed from clouding his judgment — so far. “I’ve lost six figures in a matter of hours, several times,” he says. “I never lost sleep over it.”

Mr. Lee hopes he can avoid the “addictive” behavior that prevents most speculators from getting out of a bubble before it’s too late. Perhaps the best sign that he can is his uncertainty that he will.

Investing intelligently is hard. Speculating intelligently is way harder.



Source: The Wall Street Journal,



For further reading:


Chapter One, “Investment versus Speculation,” in The Intelligent Investor

Chapters Three and Four, “Greed” and “Prediction,” in Your Money and Your Brain

William N. Goetzmann, “Bubble Investing: Learning from History,” Chapter Nine in Financial Market History (CFA Research Institute)

Carmen Reinhart and Kenneth Rogoff, “Causes of Financial Crises Past and Present: The Role of the ‘This Time Is Different’ Syndrome

Robert Shiller, Irrational Exuberance

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

Edward Chancellor, Devil Take the Hindmost: A History of Financial Speculation

Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises

Eugene N. White (ed.), Crashes and Panics: The Lessons from History

A Note on Benjamin Graham

The Extraordinary Popular Delusion of Bubble Spotting

When Does A Bubble Spell Trouble?

Searching for the First ‘Bubble’

How Many ‘Greater Fools’ Does It Take to Make a Bubble?

A Short History of Folly

A Rediscovered Masterpiece by Benjamin Graham

Are You an Investor or a Speculator? (Part One)

Are You an Investor or a Speculator? (Part Two)

Let’s Be Honest: Are You an Investor or a Speculator?

What’s Speculating? What’s Investing? Some of the Wisest Investors Weigh In