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'It's not important whether you are right or wrong, it more important
how much you lose when you are wrong and how much money you make when
you are right.': George
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of Bear Markets
an interesting article in Wall Street Journal on 24th of March,2001 or
so. It attempted to analyse a bear market from sentimental point of
view. I agree with them and thought you all might like it too. So
keeping the original idea, I am adding most of the thoughts of my own.
So please read on:
usually three phases, with more or less intensity, in any bear market:
Denial, Reality and Surrender.
When a bear market starts, people deny it. They really don't believe (or
at least don't want to believe) that market has turned down. They relate
it to previous minor reactions that market had over past couple of years
and how market bounced from there every time to make new highs later on.
So they are sure that there is no bear market in sight. They keep on buying
more and more. They even make fun of anyone who mentions a possibility
of a long bear market.
This is the time during which they spend disproportionately more time
with CNBC, stock-market related publications like Investor's Business
Daily, or on Internet sites doing investment 'research'.
Psychologically, this phase is of somewhat arrogance, overconfidence
and adventure. They still think of profit, maybe much more profit than
they initially hoped for because of the opportunity to buy at lower prices.
In light sense, they are still under the world's smartest man syndrome,
with just little doubt building up on the horizon. (Ask yourself:
Were you in that kind of mind-frame most of year 2000?)
However, the long sustained downtrend in stock prices and bear market
confirmations by analysts and media (and the value of their own portfolio)
forces them for a very hard acceptance of reality. Now they accept the
painful reality. But the pain is not that severe; they still have hope
for making up the losses (profit is now so distant they have to abandon
even a thought of it). Losses are accumulating so fast, so the thought
of break-even is more dominant than an idea about any profit. The pain
keeps on getting severe. CNBC and Nightly Business Report on TV start
getting on the sideline, time being spent researching on yahoo or reading
publications like Investor's Business Daily is cut down.
So psychologically, this is a stage of piling up frustration, tension,
stress but deep buried inside, there is still some hope. Now most of the
investors kind of decide that they would quit the market once they break-even.
They accept the 'reality' that markets are crazy and they are not for
them. (Ask yourself: are you in that mind frame currently when
NASDAQ is hovering around 1800s?)
Now a days, you rarely watch CNBC or go to Yahoo! Finance or read Investor's
Business Daily for research. The growing pain of reality starts becoming
unbearable. The prices are dropping very rapidly and have reduced your
portfolio value to levels you never imagined. You have little liquidity
left. If you are not balanced by nature and if ambitions and confidence
have been your biggest assets so far, you are in more danger. Your very
base is shaken. You are angry with yourself; but you want to blame someone
else (Rajanish once said, "It is human to err; but it is even more
human to pass on the blame of your errors on someone else".). Not
only money, but also your relationship with your near and dear ones is
at risk. Your spouse and your children hopelessly see a different you-
irritated, getting mad for no obvious reason, 'leave me alone' type of
person. (If you are from Indian culture, they will not leave you at least.
So the bear market would not take away that 'family' asset).
There is no hope for any recovery; you abandon all thoughts
of stock prices going up in near to long future (if not, ever). Market
downtrend seems as much a sure thing as the up-trend sounded when the
bull market was at its peak. Then the 'prudence' strikes us: save whatever
you can when the whole ship is sinking. So guess what? We sell
all those stocks we have been holding on during all that painful period.
We feel relived and we are out of the game (with a serious mind not to
reenter again in life time). This is called the distress selling and
usually a bottom of the bear market. (Check with yourself: has the
stage come for yourself yet? Are you going any closer towards it? Watch
yourself and you by yourself would know when the market bottoms and also
tops. One last promise I want you to make along with myself: we
will sincerely post on this message board when that time comes and I surrender
myself. It would be a nice selfless act for benefit of others.)
how determined you are to quit the game, sooner or later, the rising stock
prices of the next bull market would let those emotions take hold of yourself
once more and the addiction of the stock market (which had been such a
integral part of your life and even your personality during those years
of last bull market and very painful bear market thereafter) will bring
you back in the game. This is true for 95% people. If so, then why not
play it like a game, raising ourselves above those misleading emotions?
Only request: keep learning. Keep a diary of your thoughts periodically
and watch yourself at each step. )
my words: This is the story of not only yourself; it is mine, your friends'
and even those 95% of people who work on wall street, including analysts.