Introduction: What is investment? Why Invest?
Welcome to the fourth edition of Chain Knowledge. Following the last issue where we looked at the nature of money and the risk of inflation, and discussed the importance of QE and QT, in this issue we are going to get even closer to the everyday, starting with the price of a cup of coffee, and take you through the true meaning of investing, and why "not investing is the biggest risk".
Think back to how much it cost to buy a cup of coffee in Hong Kong ten years ago... In 2013, a medium-sized latte might have cost about HK$$25 at a local coffee shop chain, but today it's more than HK$$40, with some as high as HK$$50. There's been no noticeable improvement in the taste of the coffee, but the value of the money is significantly smaller. This is exactly how inflation manifests itself. Even if you do nothing, the real purchasing power of the Hong Kong dollar is declining. According to the Hong Kong Census and Statistics Department, the average inflation rate in Hong Kong over the past 20 years has been about 2.1% per year, which doesn't sound like much, but if you leave HK$$10,000 in a bank account untouched, in 20 years' time, its real purchasing power will be less than HK$$6,600, and this phenomenon of "seeming stability, but in reality, shrinking money" is the fundamental reason why we can't afford not to invest.
Before understanding investment, it is important to distinguish between financial management, investment and speculation. Financial management emphasizes asset preservation and risk control, such as insurance, savings and emergency fund preparation; investment is to allocate funds to assets that can bring value-added, in exchange for time to return, such as stocks, bonds or real estate; and speculation is short-term, high-risk, the pursuit of rapid return behavior, more often rely on market sentiment and personal luck.
If you only buy when the price is high and sell in panic when the price goes down, you are not investing, you are trading on an emotionally driven basis, which is no different from gambling. True investing is buying when assets are undervalued, selling when prices return to fundamentals or are overvalued, and being willing to let time prove value. There is another point that is often overlooked: inaction is also risk. Many people mistakenly believe that "not making a decision is the safest decision," but the truth is that every year you don't let your money grow, you're actually letting inflation erode your future little by little. In the long run, this "do nothing" choice is likely to cost you the most in terms of assets.
Look at the example of a long-term value investor such as Warren Buffett. In the 1950s, he bought shares of high quality companies such as Coca-Cola at very low cost and held them for a long time. Decades later, the cumulative value of these assets has far exceeded his initial investment. This was not a gamble on luck, but the wisdom of understanding that "money loses its power if it is not invested in something that will become more valuable. This is the true meaning of investing: not for a moment's profit, but to make time your ally.
The core logic behind investing: buy cheap and sell high.
When many beginners enter the market, the most common question they ask is "Will this stock go up?" and "Can I still buy this currency?", but this is really what is known as the concept of "Intrinsic Value" (IV). Intrinsic value is not a figure that can be found in the market, but rather an assessment based on the fundamentals of the asset. It is based on the fundamentals of the asset, such as whether the company is making steady money, whether there is sustained activity on the cryptocurrency chain, and whether there is a long-term need for the asset. When market sentiment is too hot or too cold, there is often a gap between price and intrinsic value, and the real investment opportunities are often hidden in this gap. The value investing philosophy that Warren Buffett and his partner Charlie Munger believe in is based on this logic. He gets out when the market panics and gets out when the market is in a frenzy. Instead of relying on market forecasts, he looks for assets that are priced below their value and holds them patiently until the market returns to its senses. Looking back to the 2008 financial tsunami, many companies whose share prices were crushed to ridiculous levels by the panic recovered in the following years, generating significant returns for value investors. Similarly, the crypto bear market of 2022, with Bitcoin below $20,000 and Ether below $1,000, is a risky and opportune time to enter for investors who understand its long-term potential. Price is temporary, value is the essence. As the famous market saying goes, "Short-term is a voting machine, long-term is a weighing machine. Only through a deep understanding of this logic will investing not be reduced to following the current of emotional ups and downs. Understanding value and waiting patiently is the first lesson every investor should practice.
Introduction to Investment Instruments and Asset Classes
The first step towards becoming a mature investor is when you begin to develop an asset allocation philosophy and understand the nature and positioning of different asset classes. Investing is never about maximizing the growth of a single asset, but rather about determining how to combine different types of assets to achieve a solid return within your risk tolerance. Below is a basic analysis of five common assets: Stocks represent partial ownership of a business. When you buy a company's stock, you are in effect linking it to its future profits and growth prospects. A quality company with stable cash flow and long-term competitiveness can generate capital gains and dividend income for investors. However, stock prices are highly influenced by market sentiment and short-term fluctuations. Without the ability to analyze the fundamentals, it is easy to buy when stocks are overvalued and sell when they are undervalued. Rare metals, such as gold and silver, have traditionally been viewed as a hedge against inflation and systemic risk. They do not generate cash flow per se, but their scarcity and long-term value-protection potential often attract safe-haven inflows in times of geopolitical or financial instability. However, their volatility is not low and they lack an intrinsic source of income, making them a suitable complementary allocation to asset portfolios. Real estate, including residential and commercial properties, has the potential for stable cash flow, inflation resistance and capital appreciation. Although real estate is a physical asset, it is subject to regional policies, market supply and demand, and interest rate fluctuations, and is relatively illiquid. Its high entry threshold and maintenance costs also make it more suitable for medium to long term allocation. Cash, together with short-term monetary instruments such as demand deposits and money market funds, offers a high degree of liquidity and capital preservation, albeit at a very low rate of return. In times of rising market uncertainty, cash provides flexibility and a margin of safety for capital deployment. However, holding cash for a long period of time is eroded by inflation and its real purchasing power gradually diminishes. Cryptocurrency is a high-risk asset class that has emerged in recent years. Bitcoin is regarded as digital gold, which is censorship-resistant and in scarce supply, while Ether supports the entire Web3 application layer. These assets are highly volatile and subject to market sentiment, technological changes and policy regulation. It is appropriate to include a small percentage of these assets in the portfolio as non-correlated assets and to maintain a high degree of vigilance and continuous learning. In conclusion, there is no right or wrong asset, the key is whether it matches your objectives and risk tolerance. A truly sound investment strategy is never to bet on the success or failure of a single asset, but rather to minimize systemic risk through diversified allocation and balance among assets. Remember the classic investment adage: "Don't put all your eggs in one basket". In this fast-moving world, diversification is the most practical way to manage risk.
Get in when you're scared, sell when you're crazy.
Success in investing often comes not from "finding the next 100x asset", but from anti-human discipline and strategy. When the market is in a frenzy and prices are out of line with fundamentals, most people will follow the trend and FOMO (Fear of Missing Out), while the real masters quietly sell for profit. On the other hand, when the market panics, assets plummet, and everyone is bearish, calm investors buy against the trend, silently laying the groundwork for the next cycle. At the heart of this kind of contrarian maneuvering is what Warren Buffett said: "I fear when others are greedy, and I am greedy when others are fearful". In practice, newcomers are advised to start with "Dollar Cost Averaging (DCA)". This approach does not emphasize bottom-fishing, but rather discipline: investing a fixed amount of money at a fixed time, regardless of the market's ups and downs, not only smoothes out the cost, but also reduces the risk of sentiment interfering with decision-making. Especially when the market is in the doldrums, although you can't see the return in the short term, when the next bull market comes, you will be surprised to find that you have already accumulated a huge position, instead of chasing the highs at the highs. In my personal operation, I use Crypto Fear & Greed Index as a reference tool: when the index is below 30 (extreme fear), I buy 1-2% positions in batches every day; when the index is above 80 (extreme greed), I sell 3-4% positions in batches; this does not necessarily mean accuracy, but it can provide an objective basis against interference to help you make the most counter-intuitive but most likely correct decisions. This is not necessarily accurate, but it provides an objective basis to help you make the most counter-intuitive, but most likely correct, decisions when the market is loudest or quietest. In addition, Asset Allocation is not to be ignored. The biggest mistake that many newbies make is to be "all in on one target". This is like walking on a rope; if you lose balance on one side, you could be completely wiped out. Diversifying your capital across different asset classes not only reduces overall volatility, but also maintains stability through different market cycles. For example, when the stock market and crypto assets fall hard, gold or currency funds may play the role of an asset haven; when the U.S. tightens policy, some emerging markets may benefit. If you're just watching the price go up and down and going with the flow, you don't have a strategy, you have emotions. A true strategy is an agreement with yourself, a systematic action between fanaticism and fear. In the long run, those who win are not betting on the future, but preparing for the day when "the future is bound to go awry".
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How to judge the value of an investment?
"Price is what you pay, value is what you get." This quote comes from Warren Buffett's mentor, Benjamin Graham, the father of value investing, and points out the most central concept in investing: the market sets a price for assets every day, but this price may not be reasonable, and what you should really be concerned about is whether the underlying intrinsic value is undervalued. To a beginner, "value" may seem abstract, but it can be simply understood as whether the asset will bring you a stable cash flow in the future. For example, if you buy a store and rent it out for $100,000 a year, that asset will have a stable income, and naturally has value. Similarly, the stock of a company that makes a steady profit and continues to grow its customer base represents long-term value. On the other hand, if you buy an asset that has no business and relies only on speculation to survive, you are in fact just playing a silly game in the hope that "the next person will take over at a higher price". One of the most common tools for determining whether a value is justified is the price/earnings ratio (P/E Ratio), which divides the share price by the company's annual earnings. A higher figure means the market is expecting higher future growth, but it may also mean that the share price is overvalued. Another key indicator is Free Cash Flow, which is the amount of cash a company actually has left after paying for all its operating costs. These data can help us rationally assess whether an asset is worth investing in or not, and are far more valid than just looking at a K-chart or a community shouting list. In the cryptocurrency world, although there are no complete financial reports, it is still possible to observe the underlying operations of the protocol through similar logic, including daily transaction volume, fee revenue, token inflation design, user retention, etc. For example, Ether is considered a valuable asset because its network is consistently active, with a high level of transaction activity, and some ETH is destroyed through the EIP-1559 mechanism, creating a real supply and demand logic. For example, Ether is regarded as a valuable asset because its network is constantly active, transactions are frequent, and some ETH is destroyed through the EIP-1559 mechanism, creating real value with supply and demand logic. If you want to extract financial report-like insights from crypto protocols, there are five key metrics worth paying attention to: daily active users (DAUs) reflect the usage of the protocols, fee revenue corresponds to operating cash flow, TVL shows the willingness to stay in the money, token inflation rate relates to the stability of supply, and protocol surplus reveals the true profitability of the protocols. This data may not be able to predict short-term ups and downs, but it can help you avoid purely speculative projects that lack foundation and focus on assets that have real long-term value and potential for use. Market prices can lie for a while, but value will eventually be returned in time.
You are your own worst enemy.
When we talk about investment strategies and asset allocation, we often overlook the most influential aspect - human nature itself. In the investment market, the real enemy is not the fluctuation of the external environment, but the internal emotional ups and downs and psychological bias. Novice investors often rush into the market due to the FOMO (Fear Of Missing Out) and suffer unnecessary losses when the market corrects. In fact, there is always more than one opportunity in the market. The only way to avoid becoming an emotional hostage to price fluctuations is to be patient and rational. Discipline is the key ability to ride out the bulls and bears. Just as an athlete needs to correct his movements through record keeping and repetitive practice, an investor should also review his past decisions through his trading records and sentiment logs to build his own system of reflection and optimization. Discipline is not only a procedure for operation, but also a psychological support to maintain rationality and stability in an uncertain environment. Risk awareness is also essential. Every investment has the potential to lose its capital, especially in a highly volatile environment like the crypto market. Before investing, it is important to honestly face the question: "Can I afford to lose all of this money? This is not only a starting point for risk assessment, but also a self-protection mechanism. Even a top investor such as Mr. Soros would never put all of his money in a single underlying asset, and he understands that risk control is the foundation of successful investing. The collapse of LUNA is a living warning. Back then, countless investors invested their entire positions in pursuit of high annualized returns, only to lose all their money in a matter of days. This event brutally revealed the price of excessive leverage and lack of diversification - the market is never kind, and overheated emotions are often the precursor to collapse. Only through rationality and risk control can we navigate through bubbles and panics to the path of long-term steady returns.
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Investment Myth Busting: Social Media Won't Show You the Losers
The cryptocurrency market is full of myths and stories, social media and news reports are full of miracles of riches, making people think that investing is an easy way to make money. However, these glamorous stories are just the tip of the iceberg, and behind them lie the failures and tears of countless people who have sunk to the bottom of the iceberg.
=This phenomenon is academically known as "Survivorship Bias", which means that people tend to see only the halo of the successful ones and ignore the cruel reality that most losers are eliminated from the market. According to Pumpdotfun's statistics, only 0.04 % speculators in the cryptocurrency market can eventually realize a profit of more than $10,000, which is a cruel fact that cannot be ignored.
Take the NFT bull market of 2021, for example. Many of the self-proclaimed gurus who were so successful at the time quickly disappeared from view as the market cooled off. These so-called "winners" are in fact the hidden losers and bankrupts of the past. Winners are not obliged to tell you how many times they have lost, and this asymmetry of information leads newcomers to misjudge risk and follow blindly.
Rational investors must see the reality clearly, stay away from exaggerated publicity and emotional speculation, and focus on long-term, prudent asset allocation and risk management. Only in this way can we identify real opportunities in the midst of chaos, avoid being mesmerized by myths, and embark on the right track to wealth growth.
Conclusion: The Only Way to Stabilize Long-Term Profits - Discipline and Common Sense
Thank you for reading this issue of Chain Knowledge. In this article, we dismantle the nature and strategy of investing from the most fundamental logic: from understanding intrinsic value and asset classes, to disciplined operation and mental management, to help you build your own rational framework. This is not a shortcut to get rich quick, but a long road paved with common sense and discipline. Investment is not a matter of luck, but a matter of stability. True financial freedom does not depend on the gift of riches, but on long-term rational accumulation. If you have already taken the first step, remember to never forget the silent but crucial partners of risk awareness and emotional discipline.
In the next installment, we will look at the unseen but dominant force behind investing from a psychological perspective: human nature. You will find that price fluctuations are not just numbers, but a psychological game of cognitive biases, emotional reactions and group behavior. If you learned something from this article, feel free to follow our Twitter and join our Telegram GroupsWe will be able to share and discuss the next wave of opportunities!
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