INTRO: We all know the saying just buy and hold.
Whether the market goes up, down, sideways, or in circles, you should forget about the
noise and dollar cost average into index funds and blue chip companies.
While this strategy is a piece of cake to follow during bull markets, it often gets
a lot harder during bear markets.
You might hold through a 20, 30, 40% correction, but at some point, most people feel that continuing
to invest is simply hopeless.
They’ve seen the market tank for weeks if not months on end due to loads of selling
pressure.
So clearly, someone is cutting losses and getting the opportunity buy back in lower.
Seeing this, they stop buying or they sell their positions as well to hopefully buy back
lower.
But for some reason, the stock just starts skyrocketing the moment they sell.
A perfect example of this was with Jack from the Iced Coffee Hour.
On May 12, 2022, Jack announced that he had to sell all of his robinhood stock because
he got margin called.
Now, Graham was super excited because he has a superstition that Jack selling is great
for the market.
And while this may seem like a silly belief, somehow Robinhood stock skyrocketed 38.4%
the day this video was posted.
Now, Robinhood is still in an overall downtrend, so for all we know, it may have months if
not years of downside left.
But, it’s still quite ashtonishing that the stock made such a move the moment that
Jack sold.
However, this isn’t just some random coincidence.
In fact, most retail investors experience this same phenomenon during every market sell
off.
They might’ve been diamond handing for months, but the second they sell is the bottom.
So, why do stocks always skyrocket the moment you sell?
SMART MONEY: To understand why the stock market seems to
always work against you, we have to first understand who controls the market.
Whether you like it or not, the stock market and most financial markets are controlled
by large institutional investors like market makers, hedge funds, and investment bankers.
These guys use their money to create various emotions within the market and then they use
these emotions against the average investor.
Their strategy hasn’t really changed in decades, but really, there’s no need for
them to even change their strategy.
Here’s the thing, while the asset that people or buying or the medium that they’re buying
it through may change, people’s psychology remains constant.
So regardless of the time period or situation, we see the same cycles playout over and over
again.
Every bull market starts out with a stealth phase where smart money buys into a promising
investment.
This initial phase of smart money investors usually doesn’t include the big hedge funds
or market makers.
Rather, this phase is filled with innovators, entrepreneurs, and maybe a bit of venture
capital.
For example, Steve Jobs starting Apple in the 1970s or Jeff Bezos starting Amazon in
the 1990s would be considered a smart money investment.
In most cases, the underlying investment is truly a good purchase, but the problem is
that it doesn’t take too long for the investment to get ahead of itself.
Once the innovators get the business off the ground, we see institutional investors flood
in.
This is where the legendary investors generally buy in like Warren Buffett and Peter Lynch.
A lot of companies also tend to invest during this time period.
For example, Ford and Amazon invested into Rivian during this phase.
Once all the institutional investors are in, they start going on TV and talking about their
investments in these companies, and this is when the average retail investor first hears
about this investment.
If they went ahead and bought instantly, they would actually do quite well, but most retail
investors are too level headed at this point to make such a decision.
They might look at the financial metrics of a company or their earnings reports.
And though they might like the investment itself, they usually won’t pull the trigger
because they don’t feel the FOMO yet or the fear of missing out.
Their level headed analysis usually tells them that the investment is selling for a
premium and that they should be able to get it for cheaper in the future.
Meanwhile, the more sophisticated retail investors who’s well aware of these cycles knows that
a cheaper opportunity may not come, so they go ahead and buy in.
A great example of this in the real world is Tesla stock during mid 2020.
At the time, the stock was selling at about $200 per share, and while this may seem like
a great deal in retrospect, $200 per share was already paying a premium given that the
stock was at $60 not long before this.
These guys won’t have to wait too long to make money though as the party is just getting
started.
RETAIL MANIA: After the sophisticated investors buy in,
we see the degenerates join the party during the enthusiasm phase.
These guys generally have no idea what they’re doing as they’re not exactly investing based
on logic or reason.
Usually, it’s just a case of, they saw some guy on YouTube or TikTok make a lot of money
with the investment, so they wanted to join the party.
A great example of this is buying doge between 10 and 50 cents.
Meanwhile, the average retail investor knows that such ludicrous moves aren’t sustainable
and that it’s just a matter of time until these degenerates get destroyed.
But, at the same time, they also see these gamblers post insane gains on social media
which gives them a slight sense of FOMO.
Shortly after, we move into the greed phase, and this is when elephants like Michael Burry
and Jeremy Grantham wake up and start calling the market a bubble.
These voices of reason calms down the average retail investor and justifies their choice
to sit out.
But, despite their grand predictions of an epic collapse, the market will continue to
roar on for years, and this is when the average investor really starts to feel the FOMO.
What if the market crash never comes?
What if this is the new normal?
What if this time is different?
If you ever see yourself asking this question, you should instantly stop yourself and not
do what you’re wanting to do because this time is never different.
But, despite this, as we enter the delusion phase of the market, all signs will be pointing
towards this time being different, and unfortunately most retail investors will give into the FOMO
and buy in.
At first, they may even be up for a month or two as we seemingly move into a new paradigm,
but it doesn’t take long for smart money to dumping their positions.
You see, the influx of retail investors gives big investors the volume they need to offload
their massive positions without hurting the market too much.
Even with all the new retail volume though, the investment will sell off a good amount
due to the big investors selling which brings us into the denial phase.
At this point, the average investor isn’t down that much, maybe 10 or 20%.
But the first inklings of fear start to set in.
Fortunately, some late retail investors who didn’t buy in during the delusion phase
will buy right now thinking that they’re getting a decent discount.
This buying pressure will cause the investment to rally back to where the average retail
investor bought in, and people will think that we’re finally returning to normal.
But, in reality, the pain hasn’t even begun.
DEATH SPIRAL: As the market puts in a lower high and volume
starts to dry up, some more sophisticated retail investors will start exiting their
positions.
This would be equivalent to when Meet Kevin sold all of his positions near the beginning
of the year.
He didn’t sell at the absolute top, but he sold before the vast majority of the pain
showed up.
And as these investors start offloading the positions and no new buyers show up, the investment
starts to sell off once again leading to market fear.
While the average investor is feeling quite fearful at this point, they feel that their
too deep to cash out now.
They might already be down 40 or 50%, and they feel that things can’t get much worse
right?
Well, they can and that’s exactly what happens next as the market capitulates.
This is when we see those 70 to 80% crashes like we saw in Netflix and PayPal.
During this captiulation, the vast majority of retail investors will sell out either due
to extreme fear or being margin called.
And the people who hold on will enter a phase of despair.
A perfect example of this in the real world is when Bitcoin settled down at $3000 to $4000
after running to $20k.
During this phase, your investment willing seemingly have no hope and you’ll probably
be made fun of for holding such an investment.
In reality, this is the best time to be buying in, but no one will care to do so.
And the few remaining retail investors will finally give in and cash out the little they
have left.
As the last retail investors are flushed out, a new set of smart money will become interested
once again.
The most recent example of this is FTX founder Sam Bankman buying into Robinhood at basically
book value.
So, it’s not a coincidence that you always end up buying the top and selling the bottom.
Through every step in the market cycle, smart money manipulate the market and your emotions
to make you do exactly this.
They buy right after retail investors are flushed out and the sell right when retail
investors reenter the market and they repeat this over and over and over again.
HUMAN PSYCHOLOGY: Something else to consider is that even if
you don’t get crushed by market cycles like the average investor, it’s likely that you’ll
still have this same feeling that stocks skyrocket the moment you sell due to human psychology.
Our brains are wired to remember the times that we messed up or missed out on something.
Meanwhile, we forget all the times that we made the right call.
A personal example of this happening to me is during the Gamestop run in early 2021.
I became aware of the Gamestop situation relatively early when the stock was at about $60.
So, I put $840 into a degenerate call and it actually ended up working out.
The following week, I upped the anti a bit and bought some more degenerate calls for
$6500.
Within a matter of hours, this position skyrocketed to $14,750.
I was torn between swinging the position overnight or just locking in the profits.
I ended up playing it safe and locking in the profits.
But, just a few hours after I sold, Elon Musk would tweet Gamestonk and the stock would
moon to nearly $500.
If I had decided to simply swing the degenerate calls over night, I would’ve made a $100,000
as I would’ve definitely sold the first thing the next morning.
And looking back, this puts me in a really ironic position.
Instead of being grateful that I made $8250 which is a phenomenal amount or being thankful
that I didn’t buy the top, I’m over here being salty that I didn’t make another $80,000.
Now on the other hand, what if Gamestop had crashed right after I sold?
I probably would’ve written off my degenerate trade as a good call and forgotten about it.
But since I sold right before such a monumental event took place, the trade has become something
that I’ll probably never forget.
And I bet that this same sentiment applies to most investors as well.
We’ll forget about the dozens or hundreds of times that we made the right call by selling.
But you can bet that we’ll remember that few time that we missed out.
And psychologically, these few times will overshadow all of our great calls making it
seem like we always sell right before stocks skyrocket when in reality, that’s simply
not the case.
FIGHTING PSYCHOLOGY: At the end of the day, market cycles and human
psychology are extremely difficult to navigate.
Even if you’re aware of all this, it’s basically a coin flip when it comes to making
the right decision when the time comes.
And while some investors have managed to overcome these challenges, the average investor will
never overcome these mind games and that’s why dollar cost averaging is by far the best
strategy for all of us.
Even though there’s so much noise within each market cycle, one thing that remains
true is that the mean is constantly increasing.
And as long as you’re putting money into fundamentally strong investments, the mean
should only go up over the long term.
Also, by dollar cost averaging the same amount of money on a regular basis, you’d naturally
be buying more shares when the market is down and less shares when the market is up.
And you didn’t even have to spend any effort in trying to time the bottom or top.
So, the next time you feel like stocks moon right after you sell or that stocks crash
right after you buy, this should be a strong signal that you should be timing the market
less and dollar cost averaging more, but that’s just what I think.
Have you guys ever sold the bottom or bought the top?
Comment that down below.
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