In a game of cricket, all the “players” are playing the same game. They all follow the same rules, and have similar sets of goals. Taking cue from that, we call everyone who invests money “investors”. When you realise how wrong that notion is, you see how vital it is to identify what game you’re playing.
“Should I invest in Bitcoin, or Apple, or only in index funds?” All of us take stock tips from financial channels, newspapers, and YouTube videos. Amateurs ask experts for investment advice. But just because a stock is recommended by others has nothing to do with whether you should buy it or not. The answer depends upon who you are, and what game you are playing.
Do you have a 25-year horizon, or are you looking to cash out in 10 years? Are you planning to sell within a year, or are you a day trader?
The factors that a person with a 25-year horizon would pay attention to would look ridiculous to a day trader because they aren’t playing the same game.
The first person’s focus is on Apple’s discounted cash flows over the next 25 years, while the second person’s focus is to squeeze a few bucks out of whatever happens between now and lunchtime.
People from whom you take investment tips maybe rational, but they are looking at the world through a different lens than your own. Problems happen when you start playing other’s game without understanding them.
Few years back I had put some money into Bitcoin. I didn’t completely understand the technology behind it, but since it had been around for a decade, I reckoned it wouldn’t die in the next 10 years. And if half of what people were saying was true, I figured I would get a good return on my investment. But the price didn’t stop rising anytime soon. It broke records every day, long after my investment was complete.
If you know anything about the market, rising prices is a drug that can make conservative investors go in for the quick buck. And I was only an amateur.
Driven by greed I started putting a bit more money into it every day. If you know anything about it, greed makes us lose touch with reality. Most importantly, greed is driven by the actions of others who are playing different games than us. Fortunately, I stopped after a few days. Many didn’t, and lost a good deal eventually.
As Morgan Housel writes in The Psychology of Money, “The formation of bubbles isn’t so much about people irrationally participating in long-term investing. They’re about people somewhat rationally moving toward short-term trading to capture momentum that had been feeding on itself.”
That was December 2017 when the tiny Bitcoin bubble had burst. 3 years from then, we’re in a similar Bitcoin bubble today. Many would lose money in the coming weeks, especially those who are abandoning their games.
Being swayed by others who are playing different games can not only influence how you invest, but also how you spend. While you can see how much money “influencers” spend on cars, homes, clothes, and Instagram-worthy vacations, you don’t get to see behind the scenes—their goals, worries, and aspirations.
Most consumer spending is socially driven—influenced by people you either admire or compete with. Therefore, it’s important to know who you take your cues from—and what games they are playing.
For example, a model trying to break into the film industry needs to maintain an appearance that I—a creator who can work from my bedroom—have no need of. But when I start to let my expectations get influenced by their lifestyle, I’m spending the money without the career boost they are getting. That’s foolish! We don’t just have different lifestyles, we are playing different games.
Few things matter more than identifying what games you are playing. Go out of your way to identify them, and don’t get influenced by the actions of people who are playing different games than you are.