It’s Deja Vu all over again

In business (and investing) it’s important to look past the emotions to find the conviction….here’s why and why it’s important to you. In November we witnessed the total melt down of the cryptocurrency empire FTX. While we’ve seen this before, what made FTX so different was it was founded on the philosophy of Effective Altruism. For those of you living in a Crypto cave, let’s take a moment to get up to speed on both Crypto and Effective Altruism. Cryptocurrency claims to be a new form of global money but with no underlying value or government to support it, crypto at its core is an unregulated security. Like any security the value of cryptocurrency (Bitcoin, Ethereum etc.) is what is given to it by its backers and, just like the 2008 mortgage backed security crisis; when support is withdrawn from any security, the value collapses. What made FTX stand out was their ability to raise capital using the philosophy of Effective Altruism. FTX didn’t only trade in cryptocurrency they also gave a lot of money away to very good causes. It was this philanthropic twist, this Effective Altruism that allowed FTX to attract colossal amounts of money. FTX investors included billionaires, sports and Hollywood stars, some past presidents and prime ministers along with a host of other investors. In a “Wolf of Wall Street receives Robinhood heart transplant”, FTX executives leveraged Effective Altruism to justify the high risks they took so they could maximize gains to create the highest possible value to invest back into human happiness. Investing in human happiness all sounds pretty good – that is until last month when a whole lot of sadness came crashing down. FTX is now in bankruptcy protection. The new CEO who previously led Enron through its bankruptcy stated about FTX, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented. "Why didn’t all the smart investors catch this? One common reason that often overrides good decision making is our emotions. This is as true in portfolio investing as it’s true in internal business investing. Emotions cloud good judgement! All business decisions are wrought with emotions. But wanting something badly and creating something of value are two different things. Passionate pleas are often used to tug on the heartstrings so we’ll overlook the underpinning strategy. While passion is important; always remember….passion alone is not a strategy! What can FTX teach us?

1. Doing the right thing and doing things right can be two different things.

2. Great passion doesn’t equal a great strategy. Good causes are wonderful but they still need a good strategy with good oversight.

3. Be wary of passionate people who try to convince you that the good cause alone is enough.

Investing to support the future is important to do. However, no matter how emotional the presentation, it still needs a strong strategy underpinning it.