If you followed the investment advice of the BlackRock CEO and went long on Bitcoin yesterday, you would have probably learned your lesson from the market today. Today, let’s take a look at how Levermore, more than a hundred years ago, fell victim to trusting the views of the big shots and ended up losing money.
We all know that in most fields, to excel at something, you need guidance from experts and masters, often needing to follow their instructions completely. You seek a doctor when you’re sick, a lawyer when you’re dealing with legal matters, and a mechanic when your car breaks down.
But in the investment industry, this rule doesn’t apply. Investing is not like seeking medical treatment, fighting a legal battle, or fixing a car; authority and experience don’t necessarily equate to being correct. Even today’s stock market legends like Warren Buffett and Charlie Munger cannot predict the past and future of Bitcoin.
Buffett expressed doubts about Bitcoin as early as 2014 in an interview, stating, “Personally, I would stay away from it. I would never have anything to do with it. I would not encourage it. I would not believe it. It’s a mirage basically.”
If you were an early Bitcoin investor in 2014 and followed the advice of the world’s most successful investor, you would have probably left the cryptocurrency market long ago, missing out on many opportunities to make money. In 2018, Buffett reiterated his negative views on Bitcoin at the Berkshire Hathaway annual shareholders meeting, calling it “rat poison” and stating that it has no intrinsic value.
Another partner of his, Charlie Munger, vehemently criticized cryptocurrencies, referring to investors as “idiots” and calling investing in Bitcoin extremely foolish.
I have witnessed many similar real-life examples around me. For instance, someone in 2017 intended to buy Bitcoin after listening to my audio, but then they heard a famous economist, Lang Xianping, saying Bitcoin was worthless and a typical Ponzi scheme, just like the Tulip Mania. So, they unquestioningly believed this economist’s words and missed out on the significant bull market of 2017.
There are many similar examples. Even if you are the CEO of a listed company or the founder of a particular cryptocurrency, holding all the information about your company, or even a Nobel laureate in economics who understands the principles of economic operations, you may not necessarily make money in the investment market. That’s because the market has its own logic, and if you think you can make money simply by relying on bull markets and advice from big shots, or by relying on so-called insider information, you are simply daydreaming.
Levermore suffered bankruptcy because of relying too much on the views of authority figures. In 1907, Levermore made a fortune by shorting cotton futures, earning him the title of the new “Cotton King.” At that time, the well-established “Cotton King” Thomas invited him to meet and proposed collaboration. Thomas, who had been in the cotton market for many years, was famous among cotton traders worldwide, much like Vitalik Buterin in the cryptocurrency world today.
Even though Levermore was already quite capable, he approached Thomas like a fan meeting an idol. However, their views on the future trend of cotton futures were opposite. In Levermore’s eyes, Thomas was intelligent and sincere, treating him like a friend. So, he decided to change his trading strategy, thinking that Thomas must know better. As a result, he lost all the millions of dollars he had previously made, adding another chapter of personal bankruptcy.
This shows that while experts and authorities can provide advice, they won’t take responsibility for your wallet. If you blindly trust authority figures, you will lose your own judgment. Even if you make money, you won’t know how you made it, and you might end up losing even more.
Now that we understand that we shouldn’t listen to authorities, let’s discuss whether we can rely on insider information. People often say that the capital market is a battlefield of information, where information represents opportunities and money. For example, if a small token has significant positive news, its price will rise. If you can access that information before it’s publicly announced, you can buy in advance and wait to make money, right? The reality is quite different.
Let’s not even consider that using insider information for profit is illegal in today’s compliant financial markets, which can result in fines and imprisonment. Even in times when insider trading was not illegal, Levermore refused to listen to any hearsay or inside rumors. Even if a friend told him the news sincerely, even if the friend put all his assets on the line, there was no guarantee that the information was reliable.
Why is that? Firstly, the insider information you receive is likely to be false. If a stock has good news, why would someone spreading the news not keep it to themselves and make a significant profit? There are often internal interest groups in the market that spread malicious false information, aiming to sell stocks at inflated prices to small and medium-sized investors. Some people still believe it and bet their fortune.
Secondly, even if the information is true, it’s difficult to profit from it when you receive it. For example, when a company’s business performance improves, and its revenue increases, insiders will know this earlier. However, will they immediately release the good news? Insiders will withhold positive news, waiting to buy enough shares before announcing it, so they can profit from it.
Thirdly, insiders will only tell you when to buy, but they won’t tell you when to sell. Whether it’s true or false news, whether you find out early or late, you still rely on others without having your own method of making money. Even if you make money in the short term, you will lose it in the long run.
Levermore himself did not listen to insider information, but his wife fell victim to it. The president of a company, pretending to be mysterious, told Levermore’s wife that their company had significant positive news, and the stock would definitely rise. He claimed to only share this information with her because he respected her. He expected Levermore’s wife to tell her husband. With the financial resources and influence of the “Stock Market Guru,” the stock price would rise even higher, and he could benefit from it. However, his plan went wrong. Levermore’s wife had just made a small fortune and wanted to make some extra money without her husband knowing. Unfortunately, within a few days, she lost all the money, and that’s when she had to tell her husband. Levermore couldn’t help but cry and laugh because it was the same stock he had shorted, and he had already predicted a major decline.
It seems that this is the difference between the stock market guru’s wife and the stock market guru himself. One listens to authority and insider information, while the other only trusts their own judgment.
So, today, the two market trading rules we discussed are lessons and teachings that Levermore summarized more than a hundred years ago. If we can understand this principle earlier, we can at least avoid some detours. Alright, let’s continue our discussion tomorrow to uncover the fatal mistakes that led to Levermore’s final failure and his inability to turn things around.
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