Investment Reflection: If I were really that smart, why did I miss out on XRP?

Source: Felipe Montealegre

Compiled by: Golem, Odaily Planet Daily

While economics studies rational actors making optimal decisions to achieve precise equilibrium, algorithmic game theory seeks to understand whether humans, who follow simple rules, can make decisions close to optimal. The process of "regret minimization" can help us understand when and how we approach optimal decisions through simple rules.

It turns out that if humans "torment" themselves with regret after making mistakes, they become better at decision-making. Anyone who has learned a new skill can observe this process. When you play Settlers of Catan (Note: a multiplayer strategy board game), you might think about why you shouldn't focus on sheep, as the price of wool will inevitably drop as the game moves into the city-building phase; when you play tennis, you learn not to go for a backhand winner, especially when you're tired. This knowledge accumulates through the process of regret minimization, bringing your game closer and closer to the effective boundary of your abilities.

We are in a frenzied bull market, and many people wake up every morning feeling regret when they see a token they didn't hold rise by 150% or even sometimes 1500%. Perhaps last week, a good friend recommended it to you, and you even saved several posts about it. You might have seen it on TikTok, thinking to yourself, "I can understand why young people would like this." So, is your regret a healthy form of regret minimization that can make you a better investor, or should you be more meticulous in your self-flagellation?

Three Types of Regret

There are three types of regret, and you should handle each type differently during the process of regret minimization.

External Regret

External regret means that you feel you made the wrong choice in hindsight. For example, in a game of Texas Hold'em, you have a pair of Aces and choose to go all-in (Note: a pair of Aces is the best starting hand in Texas Hold'em), only to find that someone next to you hits a full house on the last card (Note: three cards of the same rank beat a pair); or when you go to a nearby Chinese restaurant and find it isn't that great, you feel external regret, wishing you had chosen the other restaurant you considered beforehand, but you couldn't have known in advance.

As a fundamental investor, you also feel external regret when you miss out on XRP. Isn't a fivefold return in 15 days good? In hindsight, external regret is a poor way to learn. In a probabilistic world, anything can happen, and you can't feel regret for every missed opportunity; otherwise, you will abandon the discipline built around a sustainable and thoughtful investment philosophy.

Swap Regret

The fundamental issue isn't whether you should have bought XRP, but whether you should change the trading principles that led you not to buy XRP. This is where swap regret comes into play.

Swap regret means you regret the rules you followed and wish to replace them with better ones. When you play Texas Hold'em, even though two Aces have appeared on the table, you still go all-in with a 7 and 4 in hand simply because you're tired of folding; this is swap regret. You followed the rule of "bet big when bored," and you have reason to replace this suboptimal rule with some other optimal poker strategy rules at any time.

When Warren Buffett shifted from "cigar butt investing" to compound investing, he was learning swap regret, replacing one rule (i.e., buying relatively cheap assets) with another better rule (i.e., buying growth companies with strong moats). In the example of external regret, unless you decide to change the rule "I will try new restaurants" to "I will only stick to restaurants I already like," you won't feel swap regret in the Chinese restaurant example above. Swap regret is a great way to learn—you constantly examine the rules you follow when making decisions and ask yourself if there is a rule that could lead to better outcomes.

If you want to engage in proper regret minimization regarding XRP, you need to ask yourself if there are better rules that could help you make a purchase decision next time. Potential options include—"When an old friend texts me that a token is about to skyrocket, I should buy it" and "I should buy tokens that I see rapidly growing on TikTok." Many people are currently trying to engage in this type of swap regret learning.

I honestly can't think of any good rules that would fit into my investment philosophy that would lead me to invest in XRP, so I do not regret missing it. You can only feel swap regret when you are willing to change the rules that govern your behavior.

Internal Regret

Swap regret is the core concept, while internal regret is relatively easy to understand.

Internal regret means you did not execute your rules well. When you are a "paper hands" investor—selling at the bottom of SOL, despite having told yourself that you are a contrarian investor willing to hold through significant pullbacks—you will feel internal regret. Stanley Druckenmiller knew it was a mistake when he bought at the peak of the tech bubble in 2001, even though he was aware of it at the time. You should not hesitate to self-flagellate over internal regret and learn some of your own trading disciplines.