Free Reports

Does a 1,400% Yearly Gain Make this Asset a Dangerous Bet?

Jan 8, 2018

Rahul Shah, Editor, Smart Contrarian

Spilling a scalding hot cup of coffee on yourself is certainly not a good idea. And if it leads to racking up huge medical bills for skin grafts on groins and thighs, one would never wish such a fate on anyone.

But what if it makes you richer by US$ 3 million? Well, this is precisely the sum a jury awarded to Stella Lieback back in the 90s when she accidentally spilled a McDonald's coffee on herself while trying to add cream and sugar to it.

The punitive damages were later reduced to half a million dollars, but that is still a hell of a sum.

The question that begs itself is how do we put a price on the woman's anguish and McDonald's fault? And how on earth did her attorney convinced the jury to award a settlement of the size of US$ 3 m?

As crazy as it may sound, the lady's lawyer just decided to quote an astronomical sum with total disregard to logic.

The only thing he was careful about was that the number should appear big enough for a company the size of McDonalds, and he should give the jury at least two to three choices so even if they pick the lowest number, it still ends up a significant sum.

When the lawyer made his emotional appeal that the pain of losing a day or two of its global coffee sales could help McDonalds fully fathom the lady's agony, the jury fell for it. It awarded damages exactly the size of two days' worth of McDonald's coffee sales.

I think the lawyer didn't aim high enough. Who knows, asking for one or two years of coffee sales could also have met with approval.

To be fair to the lawyer, he was not the only one exploiting this bug in our neural code. And the jury not the only one at the receiving end.

Turns out, our sense of value is not as good as we think it is. The first number we see colours all the numbers that come after it.

So, a pair of jeans selling at Rs 1,000 may look like a steal in comparison to its rack rate of Rs 2,000, even if it is available for still 20% lower at a store next door.

Or you might think it okay to pay Rs 2 lakh for a used car because the very first car the salesman showed you was worth Rs 3 lakhs.

You never know, the guy must have done it on purpose. If he was aware of this concept of the Anchoring Bias.

Why am I giving you a crash course on the Anchoring Bias? Because this is one of the biggest reasons investors are reluctant to invest in Bitcoins right now.

They are using Bitcoin's current price as the anchor. It is colouring their views and making them conclude that if something has gone up 15x in the last one year, it probably won't go any higher.

Let me be honest. I have no idea how high Bitcoin can go because, unlike stocks, it does not have any intrinsic value. But if my own understanding and the long discussions I've had with crypto expert Prasheel is anything to go by, Bitcoin may have just started its long upward journey.

A lot of people are still skeptical about the currency's future. Our own government and the central bank certainly don't like Bitcoins.

However, if it starts getting more mainstream and considered a serious member of the global currency club, we may well have scratched the surface of its upside potential.

Will this eventually happen? Unfortunately, we have no way of knowing.

So, despite it being an asymmetric bet with limited downside and huge upside potential, it would be unwise to bet more than what you can afford to lose on your investment.

Whether you decide to take the plunge or not, Prasheel and his bitcoin guru Tama Churchouse will continue to keep you up to speed on all the latest developments on planet crypto.

So, keep your eye out for some amazing insights from them about this unique asset class.

Good Investing,

Rahul Shah
Rahul Shah (Research Analyst)
Editor, Smart Contrarian

Editor's Note: In this report, Prasheel explains why he believe you need to pay attention to bitcoin... Click here to read it now.

Recent Articles

11x Bankruptcy to Bluechip Stock: A Rare India Revival Story April 16, 2021
There is no stopping this 11-bagger stock from significant upside.
A Stock with 700% Return Potential Comes with Additional Payoffs April 15, 2021
Narayana Murthy was one of the first unicorn founders to get the backing of this entity...
Don't Write Off This Sector Yet April 14, 2021
Will apps like Netflix deal a death blow to theatres? Find out here...
The Next Set of Smallcap Winners April 13, 2021
Price is the only due diligence one might require to buy this business.

Equitymaster requests your view! Post a comment on "Does a 1,400% Yearly Gain Make this Asset a Dangerous Bet?". Click here!