Tell me if this sounds familiar. You’re holding a stock that is getting hammered and sold off, and finally after deciding you can’t take any more pain you decide to bail. You breathe a sigh of relief. You feel a little better. Then you watch that same stock go and run like the wind without you. You curse the day you were born – or more likely you blame it on the market makers (and then half seriously ask yourself if your broker is spying on you). In hindsight, the best time to buy and/or hold was also the time it was the scariest to do so.
How about this one? You’re holding a red hot runner and everything looks amazing. Higher highs, higher lows, bullish news, amazing spiking volume and everyone on the message boards is bullish. You ask yourself just how high could this rocket ship take you? You consider selling but then decide that’s foolish because everything looks so amazing. The price seemingly can’t do anything but keep running, so instead of selling some or all of your position, you hold. I mean hell, everyone on Twitter and the message boards can’t be wrong, ay? Fast forward days or weeks and you’ve lost all of those gains, and instead of holding a winner you’re holding on for dear life, hoping and praying for things to turn back around. In hindsight, the best time to sell was also the time things were the brightest and most optimistic, making selling then incredibly hard.
“In investing, what is comfortable is rarely profitable.” – Robert Arnott
The markets absolutely fascinate me for a number of reasons, but one of the most intriguing aspects to the entire system is how human psychology plays such a large role in the entire process. No, your broker isn’t spying on you waiting for you to bail so they can give the stock the green light without you, but it’s also not completely coincidental that you, I and many others will often bail at the very bottom (or fail to buy the lows) and buy at the peaks (or fail to sell into them).
When seemingly everyone and their mom is bullish, you feel great about your investment because the sentiment is so strong and bullish (comfort and complacency in numbers), but eventually the market runs out of buyers. Paradoxically, the more bullish everyone is, the less potential buyers there are to keep the move going.
On the flip side, when everyone is bearish and the price has been beat down into the dirt, it may seem like the worst time to be a buyer – but when everyone is a seller it’s a buyer’s market.
“The worse a situation becomes, the less it takes to turn it around, the bigger upside.” – Jesse Lauriston Livermore.
When no one wants a stock because everything seems to be going wrong with the company, all it will take is a little bit of good news to go a long way. Of course the devil is in the details and timing these things can be incredibly tough, but it just blows my mind how time and time again the market will do anything except what the crowd believes and expects it to do.
“The stock market is never obvious. It is designed to fool most of the people, most of the time.” – Jesse Lauriston Livermore.
I’m only writing this article as a reminder and morale boost, mainly for myself but also anyone else that needs it. Trading is incredibly difficult. If it’s not difficult, you’re in very friendly market phase but that won’t last. If you think it will last, you’re probably going to lose a lot if not all of your gains you made during the good times. Hell, even if you know things won’t last, it can still be very difficult to not get sucked into the hype.
“In a bull market and particularly in booms the public at first makes money which it later loses simply by overstaying the bull market.” – Jesse Lauriston Livermore.
The moral of the story is that even if you are on the right path, it’s probably not going to be an easy or comfortable one at times. In fact I’ll go a step further and say that if you are on the right path, you should fully expect things to be uncomfortable and very challenging at times. The big money is not made by following the crowd and taking the popular trades. You can make some money, some times, but it’s absolutely not the recipe for significant long term success. The big money is made buying when few else are, holding when most of the crowd has moved on, but then also selling into the mania down the road when optimism is overflowing.
“Successful trading is always an emotional battle for the speculator, not an intelligent battle.” – Jesse Lauriston Livermore.
Even knowing all of this, it still can be incredibly difficult to transcend it. But if you think you see the next big play and very few others are seeing it, that may be confirmation that you’re on the right path. Sometimes the most bullish sign of all is when very few are talking about something and no one seems to be interested, and that poor sentiment is overly reflected in a low price. It’s no different than when the price is sky high and the sentiment is through the roof, with everyone convinced there’s no way the rocket isn’t heading to the moon. The toughest times to buy or sell are very often the best times to do either.
So keep all this in mind as we creep through this bearish phase in many of the markets. The more people turn sour on stocks or any given sector, the more people get stopped out, the more people who throw their hands up in frustration, the closer we are to seeing bullish opportunities and good times returning. If you have conviction in an investment, don’t let the market dissuade you because it’s not seeing eye to eye with you at the moment. If I’ve learned anything, nothing happens when I think it’s going to happen, but my high probability plays tend to hit eventually. If I play them with the freedom to let them do their thing, ie don’t use leverage and invest/trade only with money I can afford to sit on indefinitely, things tend to work out quite well.
“Markets can stay irrational longer than you can stay solvent.” – John Maynard Keynes
Don’t lose the faith, the trying times are where and when you set yourself up for riches down the road. Quite often the challenge is simply staying solvent (and sane) during those phases.
