A Mantra For All Market Cycles

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by Gavin in Blog
January 31, 2020 0 comments

Traditional finance theory assumes that individuals have no emotions attached when investing or trading.

By being emotionless, they are unaffected by the ups and downs of market gyrations, simply buy and holding an asset, or following a trend, for as long as possible.

That’s theory of course.

But the reality can be very different.

Benjamin Graham has been often quoted as saying that in the short-run, the market is a voting machine but in the long run, the market is a weighing machine.

However financial markets in general are not just weighing machines, they are also very much driven by sentiment.

As the markets swing from bull to bear back to bull again, you’d be forgiven to think that our moods swing in even bigger amplitudes from euphoria to depression and then back again.

For the majority of us in the market, the biggest issue is that we tend to become optimistic and pessimistic at precisely the wrong point in time.

When markets have risen for a while, when trends have formed and matured into a proper bull market, is also when most of us want to bandwagon onto a trade already at full speed.

Inevitably the trade will turn, prices will decline and trends dissipate.

At first, the decline may look like a correction, as naturally no trend is ever linear.

But nobody can predict when a correction turns to a bear market.

And so the opposite usually happens, we panic, exit the position and sit on the sidelines nursing our egos.

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As a result of these mood swings, we give in to our emotions and buy high just to sell low.

Compare this behavior to some of the great asset managers, Warren Buffet (of course), Peter Lynch, Howard Marks etc.

They usually insist on a margin of safety towards investing. This acts as a buffer to ensure than even if their analysis of an asset is wrong – there is still a safety net to make returns.

They also have a very contrarian approach to sentiment – because the margin of safety in investments is highest, when prices are low and low when prices are high.

But the Buffet’s, the Lynch’s, the Mark’s of this world are few and far between, because their approach requires the financial and mental discipline to stick at it, despite underperforming for weeks, months, sometimes years.

So what to do?

There is a phrase which I like to come back to which is usually applicable to all life’s situations, not just in investing.

“This too shall pass”.

Many of you already know this phrase – coined by an Persian Monarch to be true and appropriate at all times.

So next time you are carried away after riding a long trend, or seeing your investment 10x – say to yourself “this too shall pass”. What does it trigger?

And when you are at your depths, starting into a screen of red, thinking there is no end and why did you enter that position in the first place, tell yourself “this too shall pass”. What does that trigger?

Just a little mantra to help us all in our investing journeys.

Trade safe!

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Options Trading 101 - The Ultimate Beginners Guide To Options

Download The 12,000 Word Guide

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