Morningstar - Q3 2022 - 12

Dispatches
No Laughing Matter
Crypto's promoters
ignore the serious side
of investing.
PHILLIPS CURVE
Don Phillips
How quickly things can change. As we entered
2022, it seemed like all the cool kids were
into cryptocurrencies. Our favorite celebrities-
Matt Damon, Tom Brady, and even Larry David-
were presenting them as the next big thing,
as something a hip athlete or movie star is into, or
in the case of David, mocking those Luddites
who are slow to grasp the game-changing merit
of this hot new thing. We were all laughing
along as their ads aired around this year's Super
Bowl, the most watched television event on
the planet. Who thought then that before
Memorial Day we'd be reading horror stories of
people who bought big on cryptocurrencies
and now face the prospect of losing their
houses or are even considering suicide because
of crypto's plunging prices. It's been a cruel
reminder that investing is no laughing matter.
Peer pressure is a dangerous guide for investment
decisions. Yet ramping up such pressure
has been a modus operandi of the cryptocurrency
movement. When everyone else is laughing
along with David, you want to be in on the joke.
When fabulous celebrities tout the hip new
thing, you want to be in on the trend. All this has
ominous echoes of the tech-stock bubble
of the late 1990s/early 2000, the last time the
financial-services industry had such a large
presence among Super Bowl advertisers. Then,
it was tech-heavy mutual funds touting
their digital expertise or online brokerages showing
a hip young worker guiding his befuddled
older boss through the process of making an
online stock trade. Let's light this candle!
Then, too, the exuberance quickly turned to sorrow.
The Nasdaq index peaked within days of the
12
Morningstar Q3 2022
2000 Super Bowl and didn't recapture its highs
for a decade and a half, wiping out many investors'
financial savings.
Playing the generational or age card is a
particularly reprehensible way to promote an
investment opportunity. We saw it in
those tech-bubble ads, and we saw it again this
spring when technology startup billionaire
Peter Thiel chastised traditional Wall Street
billionaire Larry Fink for not being hip
enough to embrace cryptocurrencies more fully.
Fostering a notion that you'll miss the
trend if you don't act now may be fine in fashion,
but it's usually rotten investment advice.
As Warren Buffett says, there are no called
third strikes in investing. You get to see
as many pitches as you like, and wise investors
wait for the fat pitch they can hit the
furthest with the greatest certainty. Those
voices yelling " Hey batter batter! Swing! "
aren't wise counsel; they are the opposing team,
or in the case of investments, those parties
trying to sell you something.
The peer pressure continues to grow, even as
devastating tales about the volatile declines
or outright collapses of various cryptocurrencies
pile up. Most recently, an impressive array
of crypto advocates crafted a manifesto of sorts
urging the U.S. government to be supportive
of cryptocurrencies and not burden this powerful
innovation with excessive regulation. They
asserted that America's ability to compete in a
global marketplace would be severely weakened
if this innovation were curtailed. In their eyes,
the very viability of our financial system and
our global competitiveness rest on our collective
ability to harness this technology. When senior
executives from established, well-respected
institutions like Fidelity Investments joined this
chorus, it created the impression that crypto
was an opportunity that our country is about to
squander and that we all need to get
on the bandwagon to remain global players.
Perhaps that's right, but examining the list of
signees, one is struck by how many of
them are engaged in selling, rather than holding,
cryptocurrencies. There's a big difference
in the economics of distributing versus buying
an investment-and almost always the odds are
better for the house than the customer.
While these supporters may well be right that
cryptocurrencies are a powerful innovation
that will permanently alter how business is done,
it doesn't always follow that an important
innovation makes a great investment, especially
from the perspective of an individual investor
with limited choices. The internet revolutionized
how we shop, but I don't see many Pets.com
investors smiling. If the promise of greater
global competitiveness bears fruit, an investor
could harness that benefit by owning
a diversified portfolio of stocks. Plunging directly
into cryptocurrencies with one's own savings
or retirement account is not necessarily the wisest
way to participate. There is always more than
one way to play any trend.
When investors are pushed into activities they
don't fully understand, that are untested,
or that exceed their risk capacities, very bad things
follow. Cryptocurrencies have all the hallmarks
of an overhyped investment opportunity.
That doesn't mean that as an innovation they
won't be hugely important or that for some
investors they may represent a worthy investment.
Still, discretion may be the better part of valor
here. Peer-pressure tactics to promote a
service not only put those buying the service at
risk, but they also often come back to haunt
those applying the pressure as well. Financial
services are a business based on trust.
Violations of that trust are not easily forgotten.
Cryptocurrencies may be the next new thing, but
in another sense, they are just the latest
test of the asset-management industry's integrity.
One thing we know for certain is that
those firms that overpromote will probably fail
this test. K
Don Phillips is a managing director at Morningstar. He is a
member of the editorial board of Morningstar magazine.
http://www.Pets.com https://www.morningstar.com/authors/286/don-phillips
Morningstar - Q3 2022

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