Change the Channel
Posted June 17, 2022
While the markets are getting hammered, and the fear is running thick, we’re reminded of the adage: this too shall pass. In the article below, James urges us to take a step back, zoom out, and turn off CNBC and go for a walk. Read on.
Change the Channel
It’s hard to be optimistic when there’s so much pain in the world.
Nobody is better at stirring up and capitalizing on pain as much as the media.
It might sound evil, but the folks at CNBC secretly high five each other when the market drops a tremendous amount.
For them this is a great thing.
When people see their retirement or brokerage account drop suddenly, they turn on CNBC or visit CNBC.com because they want to know what the heck is going on.
Bad markets make for more viewers which makes for more advertising dollars for CNBC and the Wall Street Journal.
But it's important to resist the urge to watch. Their goal is to make you as scared as possible so you can't possibly turn off or walk away from the TV.
They’ll always make a bad situation seem like the end of the world.
Just look back to March of 2020, at the start of Covid, when markets were tanking and CNBC was inviting guests to say that the world is over.
In retrospect, that was an incredible buying opportunity. Practically everyone who bought stocks for the long term in late March of 2020 made money.
However, two groups of people did not: 1) Short-term traders, and 2) people who used borrowed money (sometimes called margin or leverage) to buy investments.
These groups experienced a lot of pain.
For example, if you bought United Airlines stock when the market tanked on March 20th 2020, you would’ve been down a painful 18% just two weeks later. If you had bought the stock on margin, those losses would’ve been larger and you might’ve been forced to sell.
But if you had held on and waited it out, today you would be sitting on a 50% gain (including the recent market drop).
Which is to say, bear markets are painful for everybody, but they’re most painful for traders and borrowers.
This explains, in part, what we’ve seen in recent weeks in crypto markets.
Along with stock markets, cryptocurrency has been absolutely hammered by recent economic events.
The sudden drop in prices of cryptocurrency has created a situation where people who borrowed money to buy cryptocurrency are being forced to sell.
They don’t want to sell, but they are forced to sell in order to pay back these loans.
This makes a bad situation worse… the market goes down, forcing people to sell, which makes the market go down even further.
Unfortunately, this is a characteristic of the cryptocurrency market.
Unlike traditional financial markets, cryptocurrency markets allow for very high borrowing - for example, 100-to-1 leverage where you can borrow $100,000 for every $1,000 in collateral.
For obvious reasons, I never recommend this sort of trading or borrowing. As we can see now, when the market turns negative, it's easy to lose everything when trading this way.
On the other hand, this sort of leverage also is what drives the insane returns of cryptocurrency in boom times.
Investor borrowing allows tremendous money to be pumped into the cryptocurrency markets, which create the 1,000% returns we’ve seen in recent years.
So while cryptocurrency markets might be down for the moment, I’m still optimistic about the long term potential.
These short term price corrections are great opportunities to buy some of the best cryptocurrencies at attractive prices.
Long term, I remain confident that cryptocurrency will grow in its impact and influence on everyday life.
As cryptocurrency becomes more mainstream, I expect we’ll see the top cryptocurrency return to (and even surpass) previous all time highs.
The important thing is to remain focused on the long term opportunities and ignore the short term dips. The recent drop in the value of cryptocurrencies has absolutely no impact on the long term potential.
Cryptocurrencies I expect to do well might take a bit longer to do that, but I continue to believe this patience will result in life changing fortunes. In the meantime, I’m turning off CNBC and taking a walk!
For Altucher Confidential