A Casual Talk on Investment Timing in the Cryptocurrency Circle: Long-term, Short-term, and Effectiveness

Let’s continue our casual discussion on time series.

The theme is the duration of time and the Efficient Market Hypothesis.

The Efficient Market Hypothesis states that market prices already fairly reflect all current information,

meaning market prices are correct.

I believe this theory has issues,

because it relies on a premise.

Warren Buffett strongly opposes the Efficient Market Hypothesis,

he says that if the hypothesis were true,

he wouldn’t be able to make so much money over a long period.

The core idea of the Efficient Market Hypothesis is that market prices are random,

and all information is already reflected in the price.

I think the Efficient Market Hypothesis must include a premise: markets are efficient in the long run,

but inefficient in the short run.

The shorter the time frame,

the more inefficient the market price.

Because the stock market is an auction system,

where people constantly bid and buy,

the final price is determined by the willing lowest bidder and the willing highest bidder.

So,

short-term prices only reflect the expectations of these two individuals.

But in this auction system, most people are not involved,

only the most willing buyers buy,

and the most willing sellers sell.

Therefore, the shorter the time frame,

the less the price represents the wishes of the majority of sellers and potential buyers,

that price is false and unreal.

The shorter the time,

the more unreal it is.

Let me emphasize this again,

prices in the short term are false,

and incorrect.

On the other hand,

most information in the market is noise,

not substantive news.

Because if every piece of news were substantive,

then the fundamentals of the company should frequently change,

but in reality, a company’s fundamentals change very slowly.

A company’s business is built gradually,

industry changes are also slow,

most news is non-essential.

So we need to have a correct understanding of news.

However, human nature causes us to forget previous news when new information appears,

we only pay attention to the current news.

For example, like the current pneumonia pandemic,

our minds and attention are occupied by it,

we can’t see other things.

Our senses are overwhelmed by it,

and ultimately create a false illusion: this thing is very important.

This is the biggest influence of current news on us.

Sometimes, non-essential news is amplified infinitely,

causing distortions in our perception.

Plus, the short-term price blocks our view,

if we make decisions based on these two pieces of false information (incorrect short-term prices and amplified news),

plus the human desire for overnight riches,

it leads us to make very wrong short-term decisions,

ultimately resulting in investment failure.

This is the main reason why most investors or speculators in the market lose money.

Because human psychology is highly subjective and biased,

they hope for daily limit-ups.

They like to overreach,

disregarding objective facts.

They don’t care about time,

not knowing that seedlings need day-by-day growth,

ignoring facts,

hoping the seedlings will grow,

which inverts priorities,

this parable vividly reflects human subjectivity.

Moreover, people are often misled by short-term prices and overly influenced by current information,

leading to the failure of most investors.

This is the fallacy of short-termism.

The core logic of avoiding short-term investing is here.

Buffett said value investors should invest long-term,

not because long-term investing is the best method,

but because short-term investing has too many errors,

and the risks are too high.

From a long-term perspective, the Efficient Market Hypothesis is reasonable.

There is a Chinese saying: “A long road tests a horse’s strength,”

“Time reveals a person’s true nature.”

In the long run,

many uncertainties in business operations will be exposed,

for example, some asynchronous issues in investments,

such as financial statements not aligning with actual business operations.

Sometimes, due to current investments,

the profit in the current report is poor,

but after a year or two, it improves significantly,

because costs decrease,

and profits increase.

Some companies commit fraud,

which can’t be detected at first,

but over time,

toxic assets will be exposed.

Some companies succeed due to luck,

for example, the pandemic caused poor sales and profits,

but good companies will eventually recover,

bad companies may fail,

this is a process of natural selection.

Sometimes, temporary good luck can hide a poor company’s weaknesses,

bad luck can also make good companies look bad,

but over time,

all information will come to light.

Therefore,

I advocate that investors and speculators reduce trading frequency,

extend the time horizon,

and naturally, returns will improve.

Everyone can try,

from a business management perspective,

extending the time horizon exposes many uncertainties,

and prices will ultimately reflect the company’s value.

Additionally,

value reversion also takes time,

this is the natural way.

The natural order certainly exists,

but when it occurs and how long it takes,

we don’t know.

That’s why it’s called the natural order, not human order,

human order is based on imagination,

on wishful thinking,

and the final result will definitely not be good.

The impact of time length on our investments is significant,

we should extend the time horizon,

and the probability of success will increase.

Don’t focus on the short term,

short-term prices or news,

will reveal the weaknesses of human greed for overnight riches,

leading to investment failures.

Therefore,

the best strategy to reduce risk is to extend the time horizon,

use the long-term accuracy of time,

and improve the chances of success.