10 Solid Ways to Avoid Burning Your Money in a Market Bubble


All Bubbles Pop and Money Is Flammable

“If someone were to say to me, “I have here a six-shooter and I have slipped one cartridge into it. Why don’t you just spin it and pull it once? If you survive, I will give you $1 million.” I would decline — perhaps stating that $1 million is not enough. Then he might offer me $5 million to pull the trigger twice — now that would be a positive correlation between risk and reward! -Warren Buffett

In my other article, “You First Loss Is Your Best Loss”, I talked about some important takeaways from losing money on an investment. Losses are a fact of life in investing. There are few investors who don’t lose at some point.

By keeping losses small and letting winners ride good investors stay profitable.

In fact, many stock traders for example, can potentially have more losses than wins and be in the black at the end of the year. This is because their winners were bigger than their losers.

Risk management is important no matter what you’re investing in, whether it’s real estate, stocks or cryptocurrency.

However, with the charts of many cryptocurrencies shooting to the moon in a parabolic arc, may are calling cryptos, like Bitcoin, a bubble.

This hasn’t deterred people from investing in it, myself included. As we are about to enter 2018, Bitcoin is the buzzword. Everyone wants to talk about it and everyone wants a piece of it.

Many people don’t know anything about crypto other than it is going up in value very quickly. Imagine buying a stock without knowing anything about the company. Imagine buying a house sight unseen. The market is becoming quite frothy.

Whether it’s actually a bubble or not is up for endless debate. But if cryptocurrency might be in a bubble, and you still want to put money into it, how do you navigate these treacherous waters?

Over the years with many losses and a few bubbles later, I developed ways of approaching investments to minimize the effect of those losses.

This has kept me profitable and it’s kept me in the game. Staying in the game through many different market cycles is the key to developing yourself as an investor and growing your grubstake.

1. Know Thyself, Know Thy Enemy

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” -Sun Tzu

Your emotions by far are your worst enemy.

With many investments, especially one’s that move up very quickly, investors can get excited. It’s not unlike being high on a drug for some people.

This is the dopamine response. “Winning” triggers the release of dopamine- a feel good brain chemical. Dopamine is also linked to gambling and sex.

There are only two real emotions in investing: Greed and Fear. Both will destroy you given enough time.

We’ve all seen the investors who are excited by profits. They might be up 100 points on a stock but without selling it, it’s only paper profit.

Greed gets people to chase prices up, only to buy near the top from someone more experienced, selling into the euphoria.

Then there are the investors that get depressed from losses. These investors are like a doctor that gets queasy at the sight of a little blood.

Emotions keep people from selling at a small loss because they want to hang on. They are hoping for a turnaround. It often doesn’t come and they end up with an even bigger loss.

Hope is for church and presidential campaigns.

“More important than IQ is rationality and emotional stability. … Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Rationality is essential.” -Warren Buffett

When you’re investing you need to be mechanical. You need focus on the process, not the money. Floyd Mayweather might have been the world’s best-paid boxer, but that’s because he focused on his boxing.

The money flowed to Mayweather because his boxing was good (the best ever?). Money flows to investors because they are good investors, not because they are focused on making money.

Imagine a brain surgeon focusing on how much money he’s going to make while he’s working on your brain. Scary thought.

Don’t get excited when you make money and don’t beat yourself up when you lose. In both cases, focus on your process, systems and education.

2. Calculate Probabilities

“Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect but that’s what it’s all about.” -Warren Buffett

Some people have told me technical analysis is “Black Magic”. Others have said fundamentals and research are a waste of time.

Whatever method you use to quantify an investment, you are really looking for probabilities. You want a high probability of success.

Good investors want to know what the expectation is that they will make money on an investment. This really just comes down to math.

If you flip a coin in the air, while it’s flipping over and over, you have no idea if it will be heads or tails. But if you flipped it 100 times and counted heads or tails for each, you could begin to figure out the mathematical probability of a heads or tails.

For exceptional blackjack players, this is how they beat the casino. It’s not only by counting cards (which can work but get you banned, or worse); it’s by putting the odds in their favor through other means as well. Through betting skill, comps and other negotiated perks, people have taken the casinos for millions.

Whatever system you use needs to give you a positive expectation of making a profit over time. Once you have a system like this, you can keep throwing money at it and over time, and even with losses, you’ll be up for the year.

Think about the casino again. The average player doesn’t stand a chance. In Blackjack the casino has very small advantage over the player.

Against a perfect player, the dealer has an advantage of just .55%. But over time, that small advantage means the house will always win. The longer you play, the higher the odds are that you will lose. The house has an “edge”. The expectation is, that over time, it will always take your money.

Investing is the same. Especially in large, dynamic markets like the stock market. You are competing with people that often have an edge. What is your edge?

3. Don’t Invest Based on Fads, News or Tips

“A public opinion poll is no substitute for thought.” -Warren Buffett

Could a large swath of the crypto market be investing this way? Possibly.

It’s so tempting to go into an investment based on a tip from a friend or someone “in the know” on social media. You might see a news story with a crypto coin or stock featured prominently and in a good light. You might experience a little FOMO as a coin is making a run to ATH (All Time Highs).

It’s funny how the mind can rationalize pulling the trigger on an important investment decision this way. Realize that this is herd mentality and sheep are sent to their slaughter.

You could be right more than a few times this way, and that will only further reinforce the bad behavior, especially in a strong bull market, where everyone is a genius.

After a while, you start to invest larger sums based on information from your magical friend, possibly ignoring some rules of risk management. After all, they’ve been right every time so far (in a raging bull market) what could go wrong? They’ve got the “Midas Touch!”

But then it goes horribly wrong.

“The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.” -Benjamin Graham

Do your own due diligence on any investment you are thinking about putting money into. This will not only allow you to make better decisions in any kind of market, it will allow you to become a better investor.

4. Think About Position Sizing

“…it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” — Stanley Druckenmiller

I’ve seen investors, excited about the prospect of making a lot of money, invest way too much into a single asset. The investment went sideways and they lost an amount of money that would take them over a decade of saving to recover.

I’ve seen people use debt, or margin to invest into highly volatile assets only to have the investment go sideways, and they end up in debt really quickly.

What is too much? It’s an amount of money that will hurt you if you lost it. For everyone this is different, because everyone’s finances and situation are different.

Per Trade

Stock traders for example, because they are often wrong, usually follow a rule of no more than 1% of their portfolio risked on any one trade.

Per Asset

Some people will invest a certain percentage of their money in less volatile assets like real estate and then a smaller percentage of money into speculative, volatile assets like crypto.

For some people this ratio could be 70% / 20%. For others it might work better as 90% / 10%.

This can also be seen in people that will put their money into less volatile assets like Index funds but then invest money into penny stocks with 5% or less of their total portfolio. If they lose it all, they can still sleep at night.

Can You Sleep?

This is actually a good test even though it sounds simplistic. I had a friend that invested into a small media company in China. He only had $500 on the line but it started to go down.

He couldn’t sleep. He was up at 4am watching this stock tumble. It didn’t take long for him to realize that maybe stock trading was not for him but at the very least, $500 was too much to risk!

You want to make sure the amount you are risking in an investment isn’t going to wipe you out and that you can still sleep at night if it goes sideways.

Going “All In” is for poker. In the investing world, you want to protect your hard earned money and one of the big ways you do this is by position sizing.

5. Get to Know Volatility

“Volatility is far from synonymous with risk… If the investor…fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things.” -Warren Buffett

This is something that even many financial advisors fail to take into proper consideration.

You don’t have to go as deep into studying volatility as a hedge fund manager, but it pays to understand it. Volatility is basically how much an asset moves up and down and how quickly.

Real Estate has very low volatility. It usually takes years to make big movements up and down. Bitcoin has very high volatility and it will make big moves up and down in a matter of hours.

Higher volatility means you can make or lose money very quickly.

Notice people won’t blink before dropping hundreds of thousands of dollars into a house with a giant mortgage on it? Banks won’t blink before they lend you the money either.

But try and get a loan from a bank to buy stocks, or better yet, Bitcoin.

It’s not that you can’t lose money in real estate, usually it just happens slower and in a more predictable fashion. It’s also less likely that a property will drop to $0.

You might be comfortable putting a lot of money on the line to buy a house because you know the volatility is low. You probably would (or should) have reservations about putting the same amount into some obscure cryptocurrency. Here lies the problem.

Volatility doesn’t really equate to risk. The reason is, just because something moves up and down a lot, doesn’t mean everyone will see it as risky. They might see it as an opportunity instead.

The allure of investing into something that might go up quickly can overpower good judgment.

It can also work in reverse. When people look at a volatile asset going up and down, they may not do anything out of fear and leave their money in cash. Over time, inflation will destroy the value of the dollar and they lose money.

Volatility and it’s perceived risk can cause people to do things they shouldn’t do, or to do nothing, both of which can be risky in the financial world.

“…we define risk, using dictionary terms, as ‘the possibility of loss or injury.” -Warren Buffett

Warren Buffet defines risk as the possibility of loss and how much, not necessarily as how much an asset moves up and down.

6. Take Some Off the Table

“Bulls make money, Bears make money, Pigs get slaughtered.” — Old Wall Street Saying

Remember the emotion that is the opposite of Fear? Yup, that’s Greed.

In many volatile investments, people find themselves up 100% or more in a relatively short time. They could sell enough of the asset to cash out their initial investment. What does this do? It puts them into a risk free position.

If you’re playing blackjack and you bet $1000, then you make $1000, now you have $2000. You could now bet $2000 on the next hand, or you could remember risk management.

You could put your initial $1000 back in your pocket and play with the $1000 you just won: risk-free. It’s house money. If you lost it all you wouldn’t get hurt.

If I buy 10 shares of ABC stock for $50 (spending $500) and it goes up to $150, I could sell 3 shares and be almost risk-free. If I sold 4 shares, I would get all my money that I put in, back out, plus have some left to put in my pocket (or pay taxes).

I can then let the other 6 shares ride for free. I’m now playing with “house money”.

In the world of crypto where coins are sometimes doubling in a few weeks, there are many opportunities to cash out the initial principle and play risk free.

Sure you could ride the whole amount up and make even more, but what if it went to $0? Could you sleep at night? How much would it hurt your finances?

If your investment doesn’t pass that test, then maybe you might want to take some risk off the table when you have a fat profit.

7. Don’t Risk Money You Need

“Never risk what you have and need for what we don’t have and don’t need.” -Warren Buffett

We’ve all heard about the people betting their mortgage payments or kid’s college tuition in Vegas. I have even seen people sell their plane tickets home for just a little more cash to play the slots.

Once you understand how the casino system works, this is obviously not only foolish, it’s sad to watch. The house will take it all.

The same can be said with investing. If you have to borrow money to invest, or if you don’t even have an emergency fund, maybe you are not ready. Maybe you should not be investing right now.

No matter how bad the FOMO gets, you need to do the right thing. If you’re risking money you very much need today, to try and make money you don’tneed tomorrow, it could end up being a disaster.

The same could be said for borrowing money to invest. While this can be a good, advanced strategy in some cases, you definitely have to know what you’re doing. If not, a bad investment bought with debt can be like pouring gasoline on a dumpster fire.

8. Cut Your Losses

“The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.” — Ed Seykota

It’s emotion, human nature, pride, ego, greed, fear, you name it, but whatever the reason, most people don’t like to cut losses short. Instead, they let them ride.

Before you enter a position, it’s good to know what your max loss will be. Plan it out and stick to that plan.

Most good investors will only risk a small amount of their total portfolio on any one investment. They have a plan for when they will sell if it drops too much and they stick to the plan.

Many novice investors will hang on when the investment drops a lot, hoping it will come back up. Sometimes it doesn’t and sometimes it goes to $0.

If you are going to hang on to a losing investment, make sure you have a rational hypothesis for why you think it’s going back up.

Also, again, think about position size. If it doesn’t come back up, how badly are you hurt?

“The most important rule of trading is to play great defense, not great offense.” -Paul Tudor Jones

Most people just starting out in investing will focus on making money. Most people new to the world of cryptocurrency will be focusing on how much money they can make in this crazy market.

Good investing starts with a focus on risk management and survival. Don’t focus on making money, focus on making sure if you lose, your losses are minimized.

Think about impact and probability.

What is the probability you might lose money?

What is the impact on your finances of that loss?

If the probability is high that you might lose money, do you really want to invest in that asset?

If the impact on your personal finances is large in the event of a loss, perhaps you are investing (risking) too much.

9. Know What You’re Doing

“Risk comes from not knowing what you’re doing.” -Warren Buffett

Get educated about what you’re investing in and why. Also get educated about how you will be investing in it. This is true for all investments, but perhaps more so for investing in the crypto world.

Cryptocurrency adds another dimension to investing with the blockchain technology, software and hardware wallets, hacking, hard forks and many other issues that investors didn’t have to worry about before.

There are white papers to read, crypto gurus to follow on social media and of course, the news. Many investors forgo all that and just buy a coin because it’s “going up”.

This simplistic thesis will work when the coin is going up, but what if it starts to go sideways, or down? What will be your reasoning for owning the coin then?

Always be studying. Always be learning. Know what you’re doing before you do it.

10. Know When to Stop

“The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.” — Jesse Livermore

Markets can change. Bull markets can turn into bear markets. Investor sentiment can go from hot to cold. What was once the hottest investment of the year can turn into the biggest disaster story of the year.

If you start losing money and have a string of losses, stop.

If you feel like what was working for you before, isn’t working anymore, stop.

If you lose a lot of money, stop.

Take some time off; re-assess your system, the market, your emotions. There is no need to always be doing something.

Sometimes the best position you can take is on the sidelines.


If you’re new to the world of investing, you probably have yet to develop your own set of rules. Learning from the mistakes of others can be a great way to get started but you want a framework that is personalized for you and your temperaments.

It starts with a focus on minimizing risk. That is the root. Do that and you will create a framework that helps you protect your hard earned money so you can keep making profits for years to come.

Make it Happen

If you enjoyed this article and want to shortcut your journey to Financial Freedom, or are interested in Cryptocurrency, check out my FREE guides: “Crypto Profits” and “The Secrets of Financial Freedom Revealed.”

Click here to get the free guides right now!


Disclaimer: This article is for educational purposes only and is not a solicitation to buy or sell securities or an offer of personal financial advice. It is offered with the understanding that the author is not engaged in rendering legal, tax, accounting, investment planning, or other professional services. It is suggested you seek out the help of a financial professional before making any investing or personal financial management decisions. The education contained in this article may not be suitable for everyone — use it at your own risk.