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cyclical nature of the market

> *This article is inspired by the memo of famous investor Howard Marks and author Gerard Do.* In investing, predictability with high accuracy is almost non-existent. Why? Because the nature of the ability to accurately predict what will happen cancels out the very advantage of having that ability. This is an elaborate explanation for the folk saying “If getting rich was so easy, everyone would be rich”. Over a given period of time, there may be an investment strategy with a particular advantage in providing better-than-average return-on-investment options. However, over time, that very advantage will attract many other investors to use the same strategy until it is no longer as effective as it was originally. The popularity of an investment strategy kills its own competitive advantage because the environment in which it operates is altered as more people use the same strategy. Just like sales, competition kills profits! However, there is only one concept that investors can completely trust in the ability to predict the future. A market that goes up too high will force a fall, and a market that has been down for too long will force a recovery point. As Howard Marks said, the market moves like a pendulum, the cyclical nature of the investment world is immutable. > *”In investing, there are many things I’m not so sure about, but these things are true: cycles will eventually prevail. Nothing goes in one direction forever. Trees don’t grow in the sky. Very few things will go to zero” – **Howard Marks*** The market is like a marketplace, a collection of sellers and buyers doing transactions with each other. And these people are all emotional creatures. It can be said that the market swings from top to bottom are governed by two completely opposite emotions: greed and fear. Greed and fear change very quickly depending entirely on the investor’s expectations about the future. A bright future expectation will be the perfect catalyst for greed, and a dark future outlook will be the perfect place for fear to reign. Just like a marketplace, a digital currency will appreciate when there are more buyers than sellers. And the number of buyers will increase as more and more people believe in the bright future of that digital currency. More and more people are willing to pay higher prices until expectations no longer match reality, and bubbles always appear when there is a gap between expectations and reality. And as the bubble grew and eventually burst, the market bottomed out with an expectation of a disastrous future. This explanation, of course, omits a lot of detail, but overall it captures the gist of the long-term market swings. The market, essentially, moves like a pendulum, with the move to the extreme providing the kinetic energy for the retracement. An increasing move to the top will create an increasing impetus for the market to crash, and an increasing move to the bottom will also create an increasing impetus for the market to recover. The pendulum-like movement is catalyzed by two opposing psychological states: * Greed and fear! * Expect a bright future and a dark future tragedy! * Willingness to take risks regardless of price and not take risks at any cost! Risk is an integral part of the investment world. A reasonable market is one where investors, having carefully considered the risks involved, are willing to put their money down with the expectation of returns that are attractive enough compared to the risks associated with the commodity. invest. This is a rational process with no room for emotions. However, as things are going well and the market continues to go up, more and more investors are willing to enter the market despite the price, ignoring all the necessary caution and risk considerations. necessary for a sound investment decision. After all, it’s hard to stay still when everyone around you is dancing to the music. > *”It is the application of psychology that causes investors to overreact or under-react, and thus determine the amplitude of cyclical swings” -** Howard Marks*** Then, when The market swelled and gradually became a bubble leading to an explosion, chaos broke out everywhere, and people sold out despite the price, willing to give up the opportunity to get attractive profits because of the risk. A lot of risk has been lost during the market decline. This is a sequential phase, the formation of a bull market (bull market) up ➔ top ➔ explosion ➔ bear market (bear market) down ➔ bottom ➔ recovery ➔ go up ➔ bull market. This is an oversimplification, of course, but it’s basically a pretty accurate depiction of market swings over the long term. Long-term greed will have to give way to fear, and fear for too long will give the impetus for greed to develop. With certainty about the psychology of the market, there are two lessons investors *NEED TO REMEMBER:* 1. All fluctuations in the market are cyclical. The existence of a bull market for a long period of time creates a natural impetus to cancel that position and guide the bear market, and vice versa. 1. Investment opportunities are always greatest when most investors forget about the cyclical nature of the market. > *”Self-correcting cycles and their reversals are not necessarily dependent on external events. They reverse because trends provide a reason for their own reversal” -** Howard Marks*** In the market, nothing grows in a straight line. Things go steady for a while and then collapse happens and everything becomes a disaster in the blink of an eye, a disaster that lasts so long will make most people forget that rainbows always appear after a storm. Indeed, the investment opportunity is always the greatest when most people forget that a sunny day after a series of heavy rain days is completely possible, and certainly will happen. History always proves it! The economy will always expand and contract as consumers change their shopping behavior driven entirely by emotions. When the economy is expanding and developing, accessing capital flows through the form of credit money has become too easy, the cash flow in society at breakneck speed creates an increasing loop. chief. When the economy is tightened, it is also the time when people limit consumption to adapt to a bleak future, access to capital is suddenly more difficult than ever, investment projects are ignored. ignored despite very attractive profit prospects. Investors are willing to overpay when things are going well and undervalue when the economy isn’t as good as before. Things that cannot last forever will have to stop at some point. However, with each passing decade, a number of new generation investors come together to decide that the cyclical nature of the market is an outdated concept. They believe that the bright future will last forever, or the tragedy of the dark future will never end. When a trend lasts too long, it creates the illusion that the trend will last forever. But history has proven that the market always explodes when the good times last long enough (Crypto winter 2014 and 2018), and always recovers when the bad times must end (recovery period from 2016- 2018 then began to form a new winter 2018-2020, then the market recovered after 2020 with an impressive growth rate). The nature of the cycle is immutable, but the duration and intensity of each phase is completely dependent on how the market is doing at the time it is occurring. An investor can be sure that a market that is too high will have to fall, and that a market that has been down too long will create a rally point, but timing is always a conundrum for even the most seasoned investor. Timing the market is always a dangerous gamble, and certainly not for the faint-hearted. There is no formula for market timing, anyone who says they can show an investor how to time the market is definitely a scammer selling stupid courses. The reasoning is simple, if they really possessed that ability, they wouldn’t have to sell those crappy courses. > *”Whenever the pendulum is near one of the two poles, of course it will move back to the center, it’s just that sooner or later” -** Howard Marks*** Investors can freely news predicts that when the market goes up for too long, it will have to fall, the nightmare lasts long enough, the rainbow will appear; but the timing of the reversal as well as the magnitude of the impact are unpredictable. Adept investors with a deep understanding of financial history know that cycles happen, and they also know that investment opportunities will grow as more and more people overlook this important concept. But they are also wise enough to understand that timing to jump into the market will always be the hardest math problem, a risky gamble, but will bring an indescribable sense of joy when done right. Exactly. The market is always the least risky when everyone thinks it is risky, irrational fear that creates the illusion of a dark prospect with no way out is the necessary push in the process of eliminating risk. exited the market through a sell-off by most investors. Only a few wise investors are willing to take risks when most of the market is selling off, ready to buy when the whole world is scrambling to get out of capital. Maybe the newly created demand will be enough to create the impetus to change the direction of the market, or fear continues to reign, everything is sold off and continues to go down. All can happen but one thing is for sure, sooner or later the market will have to recover. > *”Be greedy when others are fearful, and be fearful when others are greedy” -** Warren Buffet-*** Then investors start to feel that the market is really good up, and things are not as dark and catastrophic as they once thought, and then more and more investors believe in the market’s recovery. After a favorable period of progress, greed begins to appear. Some investors began to be willing to pay more and more money for a profit prospect that was no longer as attractive as before, and then a lot of people also began to chase profits despite the risk that gradually reappeared when too much money is being pumped into the market for less and less attractive enough investments. And then the investor begins to believe that this happiness will last forever, the risk no longer exists because the investor believes that everything will always go well and the market will always develop stably. The market is always at its riskiest when everyone believes that risk no longer exists, and all wise investors understand that it is time to focus on preserving capital instead of chasing profits as originally. first, simply because they are sure that the loop will appear again. > *”What the wise do first, the fools do it last”* *Source: st Google*

Source: Collector



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