The Market Can Stay Irrational Longer Than You Can Stay Solvent
The title of this post relates to just about any environment that involves investing, markets, speculation and the like. It is a quote I was introduced to early in my day trading days and one that has served me well.
"The Market Can Stay Irrational Longer Than You Can Stay Solvent" - John Maynard Keynes
image source
I decided to write this post as several people of late had told me they never heard it before and liked the message it sent investors.
So let's talk about it a bit....
What I have learned from using this quote is that most often people are one to two years early when deciding something is in a "bubble" or "makes no sense"
I have fallen victim to this in my past. Seeing all the reasons a market is prime for a meltdown only to watch it melt higher for another year.
It's completely irrational and it doesn't matter because it is a freight train of momentum that takes a long time to turn or needs to run into a black swan event to be suddenly dis-railed.
Logic Will Ruin You
That is herein the issue. Many of us are logical creatures, thus we look at all the facts and evidence of something and deduct a conclusion. Then the market goes against it and you throw your hands up that it makes no sense.
Let the actual events dictate your pace
Here's the thing - I have thought for a year now that the U.S. stock market is due for a nasty correction. I also know that just because something is due to happen (and that's assuming my hypothesis is correct) it does not mean it actually will happen in a near-term time frame.
Reading the Tea Leaves
There is a saying to read the tea leaves, but what I have learned is that after you read the tea leaves and see the writing on the wall, you need to wait for some of those leaves to start falling before it's time to take action.
Example
The latest market crash in 2008 is a simple example of irrationality lasting longer than an investor can stay solvent.
Many traders/investors started shorting the US market in early 2007 after a combination of factors came to light.
The real estate market had been red hot and the cracks started to show in late 2006 when an October report of building permits showed a 28 percent year over year decline.
Then in 2007 sub-prime mortgages began to default and that only snowballed to the point the FED started buying the debt in August 2007 as they realized the banks could not handle it on their own.
But the party continued...
The US stock market continued to go higher despite the wheels falling off the housing market and GDP growth shrinking.
On October 7th 2007 the Dow Jones Industrial average hit what would become it's pre-crash high, 14,164. At the time it was up 13% on the year, following a 16% return in 2006 despite all the warning signs.
Irrational Kicking Solvents Butt
Think about this - Investors and traders that started shorting the market in early 2007 when the signs of trouble were clear we're likely down more than 10% on their positions at this point.
How many of you can hold a position for more than six months that is going against you?
How many of us have the capital to take even larger paper losses?
The day of reckoning
As we all know, March 2008 the market finally started to crash. A year after many investors got short the market.
Many people took losses only to ultimately be right in the end, ouch!
And why? Because.......
The Market Can Stay Irrational Longer Than You Can Stay Solvent
(or have the nuts to hang on to the position...lol)
Best Regards,
I just let the market come to me...Don't chase any investment.
Great post like always @scaredycatguide....UPVOTED
Exactly, read the tea leaves but wait till they actually start to fall :-)
Now why is that? Perhaps because people love buying the dips and selling the peaks... and that's how people make money.
Buy & Short non-stop doesn't help the direction of where something needs to go... because it messes up the charts in the short-term. (Weekly and current month
However, you can only mess up the charts and be irrational for a few months before the obvious long term trend starts to become visibly noticeable.
Solution? If you are a conservative investor... and you have long term belief in something... .buy now. Don't look at it again for an entire year, and often you will be right.
@scaredycatguide -- would you agree this makes sense, what I just said? If not, please correct. I don't want to give bad advice. :)
Two good lessons.
Thank you very much for this post @scaredycatguide!!
There is something to be said for time frame analysis, which kind of goes along with what you are saying. In the end the larger time frame dominates. Thus, yes. Just getting in and looking a year later can make sense if you are buying the direction of the larger trend.
However, I believe you can improve the entry by working your way down the time frame scale. If the monthly chart is an uptrend and the weekly chart is an uptrend and so is the daily chart, but the hourly is not. Well, that is possibly an opportunity to buy a little lower so long as the weekly, monthly and daily trend are still intact.
Very good post. I have been telling people for quite some time that the "Bitcoin Bubble" is a myth. The fact alone that people are referring to the purported bubble by the name of a single crypto-currency is indicative to the collective ignorance about the market as a whole, and renders their argument moot for various reasons.
I had not heard the phrase you mentioned in the title of your article before, but I like it. I'll have to borrow it in the future.
Thanks, that is why I wrote this post. Everyone seems to like the phrase but many have not heard it. Yes, we are still in the infancy of crypto. There will be ups and downs but I don't see how BTC and others would go to zero. It's a part of our society now.
Another good example was when everyone expected the stock market to tumble after Trump got elected yet it was quite the opposite. Financials soared 30-40% following the news and they are still near their 52 week highs
Yup - the unexpected can slap someone in the face for sure.
Hi @scaredycatguide I've published a post about you, check it out if you can, thanks.
32 Best Steemit Bloggers Of The Day To Follow 27th July 2017
https://steemit.com/steemit/@jzeek/32-best-steemit-blogger-of-the-day-to-follow-27th-july-2017
Excellent explanation. I had never heard that saying before but it does make good sense. Most of my trades are kind of lucky because I never expect the market to do what it's suppose to, and it's suppose to do what i want right. lol
Yep, the market is supposed to cater to my ideas and convictions. Doesn't it know that? lol ;-)
Maybe if we work together we can convince it to do what we want. No one's ever tried that before. lol
I took 1/2 a million off the market and invested some in gold and silver 1 year ago. I took a freaking beating. I have only lost 20k thus far but I know if I stayed I could have made a lot more.
I am finding it very difficult now to decide what to do. I will eventually do something as the worse thing is doing nothing.
Can you elaborate what you are doing with your money.
Honestly, the past few years my money has gone into acquiring rental properties and crypto. I've also made a couple small business investments. Very little has gone into equities. All though, when the time comes I do plan to short the US stock market.
P.S. - sitting in cash sometimes is not the worst play. If you do not want to be long the stock market but gold/silver is not performing. Sitting in cash ready for the next opportunity isn't a bad thing.
When do you see the next big correction in the US stock market?
This is the reason why smart investors always keep some cash on the sidelines. You can not be completely leveraged 100%, just in case an opportunity does comes up.....Then you act like a scaredycat and POUNCE! lol
Lol, nice. Yeah I know some investors that are already getting to cash for the next housing correction. Which is probably at least a couple years away since we have even stopped going up yet...lol.
As for the stock market, last year I thought it would be this summer. Clearly I'm still early. At this point my opinion is when we get the first big crack.
Everything happens in waves, we never go straight down, so I'm waiting for that first big down move and then that first big bounce. Then I will pounce and get short for the next leg down. That opportunity was there in the last two recessions.
John M Keynes was right. Markets are indeed irrational, no choice but to hodl.
The thing is, for the long term conservative investor. HODL is likely the best play.
Amazing post
It is a good quote for most people. However, I know that Benoit Mandelbrot would say that what you describe is actually the rational thing. Meaning that randomness actually works that way. People don't understand randomness, that is the problem. They think random events happen one there and one here. Nope, randomness usually means that multiple unspected things happen after each other. Mandelbrot is seen as the father of fractal geometry and he has adapted his theories to the market as well. The (mis)behavior of markets is a really interesting book to read if you want to read some criticism on how the modern market analyses go about. It isn't investment advice, but it gives you a new look on things that happen.
Cool deal, I will have to check it out!
I have voted for you can you vote my comment please .. Thank you dear in advance .