Charlie Munger once warned, "Failure to handle psychological denial is a common way for people to go broke." This is an astute observation (to rule out all astute observations), and it's particularly accurate and relevant for crypto investors, where the temptation of the ever-elusive 1000x can lead even the most rational minds astray.
You've found a promising meme - or yet another utility play that promises to revolutionise the world of finance and catapult you into the ranks of the uber-wealthy. The whitepaper reads like a techno-utopian manifesto, and the testimonials from early adopters are a lesson in religiosity and conviction. You take the plunge, pouring a significant portion of your savings into a digital asset that didn't exist 24 hours ago.
At first, the returns are nothing short of spectacular. The value of your investment soars, and you find yourself constantly refreshing your portfolio, marvelling at the ever-growing numbers. You begin to fancy yourself a savvy investor, a master of the crypto universe. And then, inevitably, the tide turns.
The price begins to plummet, and the community that was "built different" grows eerily silent. Panic sets in. You watch your gains evaporate, but rather than cutting your losses and moving on, you fall victim to what Charlie Munger calls the "consistency principle." You've already invested so much time, energy, and capital into this venture that abandoning it feels like an admission of failure.
And so, you double down. You convince yourself that if you put in more money and hold on a little longer, the price will rebound, and your investment will be vindicated. You scour online forums for any shred of positive news, any glimmer of hope that might justify your increasingly irrational behaviour.
But deep down, you know you're grasping at straws.
The "deprival-superreaction syndrome" comes into play. The looming prospect of losing your entire investment becomes so psychologically unbearable that you'll do anything to avoid it, even if that means throwing good money after bad. You become consumed by the FOMO, convinced that if you sell now, you'll be forever haunted by the "what ifs" of potential riches that could have been yours.
This is a dangerous game to play. The crypto market is the definition of volatile, and even the most promising projects can go bust in the blink of an eye. By refusing to accept the reality of your situation and cut your losses, you're setting yourself up for financial ruin.
You are, in fact, fucked.
The key is to cultivate a sense of detachment from your investments. You should be passionate about the projects you believe in but be willing to reevaluate your position when the facts change.
Crypto is full of true believers willing to ride their investments into the ground rather than admit defeat. But as the old saying goes, "The market can remain irrational longer than you can remain solvent."
There's no shame in admitting when you've made a mistake. The ability to do so is a hallmark of successful investors. Munger says, "I can afford to write this one off and live to fight again. I don't have to pursue this thing as an obsession in a way that will break me."
I've learned this the hard way.
My long-term investments are in WIF, Degen, Sol, Eth, and several angel checks. I believe in all of them with a robust and reasonable conviction. And I've made a confident sit-on-my-ass buy. I know the price points I'm looking for. I know when I will cut my losses if they materialise.
But I've also lost enough through significant investments in Yuga projects and c. 2017 utility plays that I can tell you honestly - I know the sting of overinvestment.
The graveyard of failed projects and bankrupted investors is littered with those—like me—who fell victim to their psychological denial and refused to see the writing on the wall until it was too late.
The rewards are there for investors who can master their emotions and approach the market with a level head. Invest only what you can afford to lose, don't pretend to be an investor when you're a speculator, and be willing to pivot when necessary. It's a simple formula. I don't always follow it, even if God knows - I try.
Markets aren't mystical. They're a lot like life itself. There will be ups and downs, winners and losers, and opportunities to learn from our mistakes. My only edge is that I have learned to stay grounded, to keep my ego in check, and to remember that no investment is worth sacrificing my financial and emotional well-being.
Charlie Munger reminds us that failing to handle psychological denial is a common way for people to go broke. We can avoid the disasters that have claimed so many before us - myself included - by listening, learning, waiting, and approaching the crypto market with scepticism and self-awareness. It's not always easy, but nothing worth doing ever is.
