Dread is not a strategy.
The market is the great allocator from those who can’t control their thoughts to those that can. Vince Lombardi said “fatigue makes cowards of us all.” There is nothing more fatiguing than watching your portfolio go down month after month. The stress is sometimes too great, cowardice wins and we sell when the market is down and only get back in when the market has come almost all the way back. We wash out the returns the market would have given us for free.
The cycle repeats itself over and over again on it’s march to higher and higher highs. Some go to cash at the bottom and stay for months or years. Then one night-at the third Christmas party since you went to cash, you continue to hear people talking about how they are up 50-100% over the time you have been in cash. The pressure to get back in is unbearable. So you buy high. Again. And again.
Capitulation is the moment when the last one to chicken out, chickens out. The market is now at the peak of opportunity, the chance to buy companies at values from 5 years or more ago in some cases. But this is the moment of no hope for those that don’t get it. But the frozen unchosen sit on their hands with no hope. “What if it drops again?” It may, and it really doesn’t matter, long term, that you didn’t buy at the absolute bottom! You aim to buy great companies at great value. So while after capitulation maximum opportunity lurks, fear keeps some from doing the right thing.
This is not because people are stupid (some are) but not most. An analogy from 09/11. What day was the day of maximum risk? I could say September 10th was the day of maximum risk, because no one had a care in the world about a terrorist attack. After we saw it, lived it, it became horrible and it seemed like we were on the brink of a bigger disaster. After it we were fearful, but didn’t need to be. We have it backwards many, many times in all parts of life. There are many reasons a stock can only go so low. I will address that in another article.
This is the snare of the fear and greed cycle. How it looks graphically:
Always remember rule number one: “Quality equity assets increase in value over time.” Because you are an owner of equity, good companies or good real estate, you will beat inflation and accumulate wealth. Stay off of the cycle!
See you soon,
Craig
This article also appears at craigverdi.substack.com