The Diamond Hands Principle

Diamond Hands

I’ve followed Reddit investing drama and memes for a while now, and I think it’s time I articulate my understanding. This has the potential to change the course of the economy, and will continue to influence the rise and fall of stocks going forwards if more are adopting it. I will state the “not financial advice” legal disclaimer, but I’m not going to name you specific securities anyway. Let’s talk about what it means to have diamond hands.

Does Diamond beat Paper?

I’ve been through all kinds of investing educational materials, but every time it’s the same things. Set stop orders to lock in profits. Look for analysts you trust. Diversify using ETFs (stocks someone else picked). Invest on margin to get better returns. What if I think debt and loans are a bad idea? What if I think my money choices should be my conscious decision? What if I (someone paid to automate things) think we should be suspicious of automation as a substitute for moral action? What if I think the best choices in life are the ones that require personal sacrifice and only my own skin in the game?

The New Old-Fashioned Way

In the bedrock under the “diamond hands” meme are some pretty old views. What’s funny is the principles most “new” phenomena are based upon aren’t new ideas, they’re just the new way of expressing them. Value Investing is the idea that you should invest in what you deem is empirically worth investing in. In practice it’s the anti-establishment approach to the economy. Good value investors generally follow neither the conventional wisdom nor each other. In the words of early 2021 Redditors, they like the stock. They do their own “due diligence” (or DD) and report and debate each other’s findings. They are skeptical of analysts, who are other humans with their own biases.

Warren Buffet is the name everyone knows when it comes to value investing. But of course, the next thought people have is to grab everything he has said and try to emulate him. That’s the wrong approach. See, here’s the catch: when it comes to value investing – to do it properly philosophically, you can’t just rely on someone else. By the time you know what Buffet invested in you’ve missed the window. You need to think like he did 50 years ago. You have to do your own research, and put money on what you think merits it. You need to own the decision. It’s not a less risky gamble to expect other people to make money for you. It only eliminates effort on your part, oddly in an area of your life you value highly.

Paper Hands

When you trace economic decisions influencing markets, a large share of them are made on the basis of other people’s analysis. This extends to such a large degree that the market will go down merely because society thinks it will, and it will go up because society thinks it will go up. The opposite ordering should be true. People should be able to predict it well based on how companies are performing, not based on public perception of people who don’t even invest. Politicians and activists and other wealthy public figures appear to accrue wealth in conjunction with this influence. To the extent it’s true, it’s punishment of the masses for lack of faith in themselves and for giving their personal power away to people all-too-willing to take charge of it.

Similarly, the modern way of investing money on a day-trading or frequent basis is to sell stocks when they drop a certain percentage from all time highs, or to buy ones when they cross a certain percentage over certain lows. To sell going low, buy going high. It is not an insensible strategy to lock in profits and minimize loss. But it functions as if you are relying on letting the market to decide how you will buy and sell. You are being reactive on your investments, instead of proactive. I, along with some others, think there’s a better way.

The ๐Ÿ’Ž๐Ÿ‘ Principle

I equate the principle of diamond hands to what a well-versed religious person calls faith, what a philosopher may call integrity, or trust.

This is the Diamond Hands Principle:

If you like the stock, buy the stock. If the stock skyrockets, do not sell the stock. If the stock drops, do not sell the stock; consider buying more instead.

You have to decide why it is you want to make an investment. You have to decide if the future of a company is bright, if it is innovating, if it is making the right decisions internally. But if you decide it is undervalued and you like the stock, act like it. Have some faith and trust in yourself.

Is it risky or foolish? Those looking mainly to lock in profits the old ways will say yes. I’m not looking to lock in profits immediately. I like the stock. The things I invest in are things I think should succeed.

Buy low, sell high. Hold. HOLD. HODL. Maybe sell a little when it’s high to cut your losses. If you do this wisely, you can eventually remove the amount of money you have invested, and having broken even, hold a good amount with diamond hands until the end of time. But the general rule is to hold, and buy or sell only in rare circumstances. So much so that the typo “HODL” has become an in-joke; some go by the affectionate term “hodlers”.

How to Have Diamond Hands

You can’t simply adopt the principle out of mere wanting to. There’s a reason the Reddit and 4chan frequenters refer to themselves as autistic or as crazed animals. It’s about defying the odds. It’s about staring in the face of losing a lot of money and not blinking. It takes a large amount of courage and some would say a measure of stupidity.

I’ll always laugh at this tragedy from Isaac Newton’s finances. You should read The Intelligent Investor yourself. Buffet did. It’s ancient, you can find a PDF.

Back in the spring of 1720, Sir Isaac Newton owned shares in
the South Sea Company, the hottest stock in England. Sensing that
the market was getting out of hand, the great physicist muttered that he โ€œcould calculate the motions of the heavenly bodies, but not the madness of the people.โ€ Newton dumped his South Sea shares, pocketing a 100% profit totaling ยฃ7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher priceโ€”and lost ยฃ20,000 (or more than $3 million in todayโ€™s money). For the rest of his life, he forbade anyone to speak the words โ€œSouth Seaโ€ in his presence.

Jason Zweig, commentary on the introduction to Benjamin Graham’s The Intelligent Investor

If you want to have ๐Ÿ’Ž๐Ÿ‘ and not ๐Ÿงป๐Ÿ‘, it will help to decide what it is you are willing to lose. Don’t invest money that you can’t throw away. I also refuse to trade on margin, which essentially means using your investment as backing to take out a loan to invest more. I believe debt is an evil seldom necessary, and loans to increase gains seems like a deal with the devil for greed’s sake. Personally, I also agree with Elon Musk that shorting (the process of borrowing stock you hate to sell, to own a “negative” amount), should be illegal. It offers infinite risk for rewards.

Those who hold out on an investment seemingly beyond its prime are referred to as the “bag holders”, a term as old as Thomas Jefferson’s usage in 1793. You don’t want to be the person left with the dregs of your collective effort while others run off with the valuables. So what do you do when someone challenges or mocks you? Return to the principle itself. Do you like the stock? Revisit or do more analysis. Go take another look at a company’s big three documents: Income Statements, Balance Sheets, and Cash Flow. If you’re confident in your decision, stick to it. Time will tell. The only true bag holder is the person who sells at a loss. I’ve seen many who sold a stock that collapsed and then rose again, to become bag holders of a stock that was doing well, holding a bag of their own making, snatching defeat from the jaws of victory.

Don’t let other people tell you what you’ve seen and decided. Don’t let other people tell you what to buy or sell until you’ve gone and verified what they say yourself. Trust your own judgement work on improving your own judgement.

Concluding Personal Disclaimer

I recently turned more than a 1000% profit off of one investment in 3 months. That’s mainly what urged me to write this. I knew I would, few else who had the money did, and I couldn’t afford to put forward much at the time. Had I seized another earlier opportunity it would have been a 10,000% or even 100,000% profit. But hindsight is too late, so I look forward to the next good thing.

I am down a little from decline of one heavy speculative investment. The fact of the matter is, I don’t feel I’ve lost that one because I still think that investment is seriously undervalued. I’ve made substantial gains everywhere else so far, and the one “loss” I expect a massive return on soon. It’s not a loss until you sell. I’m willing to live and die by that sword.

My investments are new, and still modest in the 4 digits, but I’ve found they outperform the market whenever it turns down, and keep up when it does well. I am concerned about the value of the U.S. dollar like many other Americans, I suspect an economic downturn soon, and then possibly an upturn after that. Everything comes and goes, but one needn’t be blown about by the short term winds.

There’s nothing constant in life but change, and I plan to have diamond hands in the face of it.

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