The 4 Horsemen Apocalypse Of The Stock Market
Fear, Greed, Hope and Ignorance are the 4 Apocalypse. Of the 4, the first 3 have to do with human emotions and they have together wiped out more wealth in the world of investing than any bear market had done in history.
The last one, ignorance has to do with the intellect. Ordinarily, it should be the only thing that causes us to lose wealth. Unfortunately, it is not even as harmful as emotion agents.
At the peak of GameStop’s fiasco last week, some people invested their life savings, some invested other people’s money, others their rent and the story goes on. As it would turn out, a lot of them were buying at the peak of the price. And now they have to painfully pay for it. Emotions ruled, greed prompted them to think they could make easy money and cash out, fear of missing out from the trendy was their guiding light and the hope that the price would rise again won’t free them from cutting their losses.
We are all subjected to these emotions, GameStop only came in as an example because of its recency. How many people bought Tesla for the same reason or Zoom or any other stock. How many have sold a stock because they couldn’t control their emotion or buy because emotion prompted them to?
Handling the apocalypse
Fear can drive us to either buy an asset or sell one. Fear of missing out will drive us to buy what you were not prepared to buy and fear of being in will force you to sell an asset you are supposed to hold. On both ends, knowledge and having an investment process will save you a lot. Knowledge about the asset in question and having a process about what to do when what happens is a saving grace.
I know emotion though, and I know we cannot always act according to reasoning from knowledge and process. So It may be wise to follow the process advised here.
Just like fear, hope works both sides of the market. You can hope that the price will fall further allowing you to buy at the bottom. Or you can hope that the price will rebound therefore holding your position instead of cutting your loss. Again, knowledge and process is your best solution here. Knowing what factors drive the value and paying attention to the behaviour of that factor is how you arm yourself with sufficient knowledge.
Here again, emotion will want to overpower you. My suggestion is that you note when you are being led by hope or by knowledge.
This is the father of all wealth destroyers. I will use an example of a trader here. If you are a trader, the most important skill you need to cultivate is to know when to take profit and move on. Ordinarily, you might have set that from the moment you enter your trade. But you see as your strike price approaches, the potential of getting more gains from the trade will entice you and you will adjust your analysis to accommodate your greed. That’s the beginning of failure. You see, we all want to make the maximum money from the market and this has cost a lot of us. Your goal as I’ve always said is not to make the maximum return in the market. Rather it is to make enough within your acceptable threshold or risk.
You will have to deal with your greed (and we all have it) to be able to control this horseman apocalypse who can turn your fortune into an overnight misery.
Ignorance should have been the cause of a lot of woes in the market unfortunately it’s not. However, it has its fair share of woes as well. A friend called me towards the middle of last year to lament how he has lost about 50% of what he invested in the stock market. How do you lose that much in a bull market? He’d bought stocks in an industry that was negatively affected by the pandemic. He was unaware. That’s the reason.
Ignorance can only be solved with knowledge. Get knowledge about whatever you are investing in and you will solve this easily. Remember the mantra, ‘never invest in anything you do not understand’. Well, that’s me saying it again.
2 years ago, I wrote here that the stock market can be as simple as buying and selling. However, what is most important is your motivation for buying and selling. Is it greed or fear or hope or ignorance for you? Be aware. The most optimal reason for your buy and sell of course would be knowledge.
Get knowledge, have a process, yield less to emotions and you will see your wealth grow with time. Fear, greed & hope have wiped out more money than any bear market in history.