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Hey friends, how are you all doing? In this video, I want to share a reflection on a video I recently saw that I think might offer some interesting insights about risk and how we manage that risk with our investments, even mentally, how you interpret and see things. But all this after intro. So guys, you know, if you like the video, leave a like, if you think it's good, share it with others, and let's get to the content, guys.
Here's the thing: I was here watching videos on the internet, updating the channels I follow, and suddenly YouTube recommended a video by Howard Marx. For those who don't know, I'll show you who Howard Marx is, and that the guy is amazing. I'll show you here. So here, Howard Marx is an investor, writer, and has a famous book on market cycles.
I already mentioned this in a video from a while ago on this channel, but the guy is really amazing, you know? The billionaire manages billions in Tree, which is his capital management company, and this guy has... A lot of things have a very long history, so I'm not going to go into detail about their history.
I really like the book on the market cycle. Because, for me, if you want to invest, you have to understand a market cycle. Because if you're entering at a time when you don't know what you're doing, maybe you're entering the market at the wrong time. Probably because when everyone comes to invest and the masses enter, usually people are euphoric, usually the market is at its peak, and sometimes they end up getting screwed.
But the fact is, understanding the market cycle is very important, even more so in his case, since he's a manager. So, for example, the market cycle, right? You see, in 2018 he released this, but the fact is, YouTube recommended this video here, which is this video: How to Think About Risk with Howard Marks.
So, here it is, coming to the recommended ones, right? Sometimes YouTube gets it right, right? Sends some good ones here. And I recommend you watch this video in its entirety, it's half an hour long. This video has English here, but you can add subtitles if you don't know English. It 's very interesting, some of the comments are interesting because, let's reflect on this: we don't know the future, so how do you measure risk when investing?
What is a high-risk company, a high-risk investment, or a low- risk investment? So, what he brings up is a question we discuss a lot on the channel regarding probabilities. I'll give a summary of the video here: What is more likely to happen? This company is, for example, cheaper or more expensive, and what is the probability of it happening?
Is it already so cheap that its tendency is to go up or down? So, this part of the video discusses what your biggest mistake is. What is the biggest mistake? Buying high and seeing the price fall, or selling low and missing out on the recovery? So, this is an interesting question because if you're entering the market when everyone else is, you'll probably buy high, and this "buy high" thing can continue to rise, but the high can always continue to rise.
If it's the best company in the world, but naturally, if it's expensive, it keeps going up and up, and you don't know what the risk of that is, right? So, the question I want to bring up here is that you have to think about this: you don't know the future, you don't even know what tomorrow will bring.
You have a higher probability of what you're planning happening, but eventually something different can happen. And there are companies and investments that are sometimes so undervalued that they reach a point where they can't fall any further, or the chance of them continuing to fall is very low, so the risk is reduced.
So, I'm recommending this video to you; watch this video in its entirety because I find it very interesting. The title is here, so it's from the company itself, which is the company, and so on. Okay, and what I want to bring up when you stop here—I'll bring up the Bitcoin chart, in this case, right?
Here's the Bitcoin chart, but I want to bring it up here in this other chart here, which is in question, as we're talking about probabilities. When you think about probabilities, you have to remember that the price of anything fluctuates a lot, up or down. And we're talking about standard deviations, right?
When we take a standard deviation, it's when you take a metric and see the standard deviation of that metric—if it's too high or too low—and generally these standard deviations indicate peaks or troughs. So here, for example, in the case I came to show you, the standard deviations here are upwards, for example.
I'll erase the ones below here because they're not necessary, and I'll leave the standard deviations here. These are the three green lines that theoretically mark the top of Bitcoin. In this case, it's showing the MVRV, which is the market capitalization divided by the unrealized profit. If you do n't know what that is, I'll leave a video just about MVR that I brought in much more depth, which is the unrealized profit.
So when you have here, for example, the MVRV of one standard deviation from the mean, it corresponds to 80% of the price readings being below this green line. So if I take a total cycle here, you agree that the majority, 80%, of the price is below this green line. It was above this little bit here. Some segments were jumping to this green line, you see these peaks, you see?
So there's a standard deviation above the average. So, as I said, we don't know how to control what's risky and what's not. So, for example, when you see the bottoms, what's very far away, right? So, if the standard deviation is negative downwards, the risk is very reduced. When you're getting close to this green line, for example, we've reached the 70,000 range.
Is it time to buy Bitcoin? No, we 're giving a risk H that's way above 80%. The price was below that, so look, at one and a half deviations, 90%, with two standard deviations, 95% is below those metrics, right? And at today's price here, for example, look, with the standard deviation of 80%, Bitcoin 90,000.
Of course, this metric will change over the days, right? It doesn't mean that the day it hits here will be the day. Look, with 90%, I saw the pattern, right? 1.5 standard deviation, 90% chance of the price falling again. ...and 105,000 and finally 120, that's why I say that even though the price is rising, these metrics will keep rising.
When you see the price entering these ranges, the price is already ultra-hot. And bringing it here to the distribution part, to make this histogram more clear, here you have an idea of what risk is, so here it's divided between Bear, Bull and total, right, considering the standard deviation of the cycles, right, where it entered the Bull, the Bear, and so on.
But let's take, for example, I'll erase everything that's bull and bear and leave the total. This here is the standard distribution. At the current moment we have a moving average of 64% of all readings, regardless of what it is. The price really wants to pull a little towards the zero line, wants to bring it to the center, but if it's 64%, practically two out of every three readings are down, one out of every three is still up, it's not that hot.
I said if you bring the bull part, right, considering that we are in a bull market, and as we are, we are at 54%, but... Look, here we go, in the range of 1 and here, remember the 90%, you see? Here it's 80, 80, 90% here, 90% here, and here it's 95%. Man, the price pulls this way, so it could be the best asset in the world.
Bitcoin, for example, is a great asset, but buying when the price is up here has a lot of risk involved because of the magnetic weight, the magnetic axis, the risk tends to return because it's so, so, so, so expensive. So many people are profiting that these people will eventually sell, and you're buying from someone who is willing to sell, which is the person who bought when it was down here, right?
Imagine when you bought down here, in these readings, down here, there was a 6% risk of the price falling down, which is much less than 90, right? So, it 's a probabilistic view, a statistical view of how prices behave. That's why the 200-period moving average, or these distributors, these distributions of MVRV Sofer and Company, they are...
So important for you to analyze a chart, beauty, it's not crypto, it doesn't have software, it doesn't have MVRV, but look at the 200-day moving average. The lowest multiple with the 200-day moving average is already a good indicator of what the standard deviation is. Since everyone looks at the 200-day moving average, which is the 200 business days of a year, considering weekends and holidays when the traditional stock exchange is closed, it already serves as a good parameter to see what's hot and what's not, you understand?
So guys, I hope you liked today's tip. It's a really cool video, I'll even rewatch it because there are some things you need to digest a bit. And that's it, because the issue of risk, what is a good asset, a bad asset, there are companies that are horrible, but you'll see profit, fundamentals, everything, but the risk is more embedded in the moment you buy than in the asset itself, sometimes because the market is irrational, something that isn't so good becomes very good, right?
Considering meme coins, cryptocurrencies, trash, by chance, explode, right? But why did it explode? As soon as the guy saw the fundamentals, it wasn't there, but it was so cheap sometimes that it was worth it. Of course, there are things that go to zero, but it's the same, it's the risk of ruin, right?
And so, if you're prepared for the risk of ruin, the problem is yours, but I think it's interesting for you to think this way, and every time you're going to buy an asset, take a metric, in this case the 200-period moving average (MVRV), as I showed here, and see where it is in that distribution. You see that it's very hot, sorry, wait for it to cool down and try to buy on a pullback, for example.
Or don't even buy, wait for the market to fall a lot, when it's also very low with a metric way down. Then you can talk without fear, because obviously it can continue to fall, but the risk is infinitely smaller, right? 90% to 5 PR 6% Wow, a brutal and gigantic difference. So, guys, I hope you enjoyed this video, see you next time, and bye.
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