Please Read the Prospectus Carefully
Everyone's talking about behavioral finance these days. As marketers, we know how important it is to pay attention to these biases when rolling out a new product or initiative. The same is true when it comes to investing: We all have emotional biases that influence our decisions. But looking at the financial news in recent months, I had to wonder: Is lunacy considered an emotional bias? That seems to be a potential explanation for situations like this:
It's a mythical creature known as a "cryptocurrency." A new Bitcoin is "mined" by computers that devote massive processing power to the task of solving a string of complicated mathematical calculations. As Bloomberg Businessweek put it, Bitcoin is "money made from nothing but ones and zeroes."1
Despite its virtual existence, each Bitcoin is now worth a few hundred bucks of real money. But consider this: Between July 2010 and August 2013, Bitcoin had an average daily volatility of 7.2%2, which equates to an annualized return volatility of 136%. That's not a market—that's a casino.
Actually, I have to admit to being a Bitcoin fan, because I find it fascinating that a new currency can be created based on nothing but...well, the fact that somebody decided to create a new currency. I'm tempted to buy Bitcoin in the same way I'm tempted to buy a few shares of that unicorn farm they plan to build on the moon. When it succeeds, it'll be amazing—and I'll be RICH!
Here's a stock that's trading at about 170 times its forward P/E. In other words, people are filling their trunks with stacks of dollar bills to buy a stock based on the expectation of ginormous earnings sometime in the future.
Why? Because it's what people are willing to do to gain an advantage over those who think it's crazy to take on risk like that. It reminds me of the National Football League, where Team A will pay a first-round draft choice millions and millions of dollars before he even steps on the field simply because Team B will do it if they don't. It also reminds me of the NFL's concussion problem, for some reason.
Even Tesla Motors’ CEO, Elon Musk, sees the incongruity: “I try to avoid watching the day-to-day share price, because it’s somewhat distracting…People try to really read the tea leaves, even though there’s really not enough information to make conclusions. And then they’ll get exuberant, and then depressed."3
I admire Musk's honesty. In fact, I will definitely use his sure-to-garner-an-astronomical-p/e private space travel business to visit my newly purchased unicorns in their moonbarn.
Don't get me wrong. I hope Bitcoin and Tesla are around for a long time. I might invest in both of them at some time in my life. Actually, I bought some Tesla in my IRA and held it for about half an hour, shrewdly selling it for a profit of nearly 10 bucks. (Don't tell my wife what I'm doing with our retirement funds.)
But for now, I'll let everyone else read the tea leaves. I'll bravely jump in when all the mystery and excitement have passed—along with most of the potential profits.
Wait...isn't that loss aversion bias?
 Ashlee Vance and Brad Stone, "Bitcoin Rush," Bloomberg Businessweek, Jan. 13–19, 2014, page 48.
Radoslav Albrecht, “Bitcoin Volatility—The 4 perspectives,” bitcoinmagazine.com, posted Aug. 27, 2013, retrieved June 9, 2014.
“Tesla’s (TSLA) Musk: People Really Try to Read the Tree Leaves,” wallstreetpit.com, posted June 9, 2014, retrieved June 9, 2014.