Markets Can Stay Irrational ...
In this series of stock market proverbs, I have another gem to share with you guys and this one is specifically for traders. It goes like this…
Markets can stay irrational longer than you can remain solvent.
Now, what does it mean?
Stock markets are known to be irrational. We all know how greed and fear can make the market do crazy things.
And it is broadly assumed that this irrational behavior is short-termed and that sooner or later sanity prevails in the market.…and life goes back to normal.
But the reality is that the irrationality in the market can stay longer than you think.
Think back to the Covid time when the market kept falling day after day and every time we thought about how much more can it fall, it fell down some more… don’t know how many of you were there but was like a free fall…there was no bottom.
The same is true on the bullish side…look back at any stock market bubble and you will see the market climbing up month after month with no care for valuations or gravity.
Now, when the markets are behaving illogically, we say to ourselves that “hey, how much more can this craziness go on…at some point it has to stop, right?
So, in this so-called rational frame of mind, we do things opposite to the market direction. When markets are falling we buy and when markets are going up we sell.
Now, if you are a long-term investor, your mistakes would be forgiven because time is on your side. Right, if you bought a few stocks for bottom fishing but they kept tumbling down, you may have to hold on to them for maybe a few more months or years but eventually, you will be fine.
But if you are a short-term trader, then you get no mercy from the market. Why?
Because markets can stay irrational longer than you can remain solvent. Solvent means your capacity of risk tolerance is over…the losses will increase to such a high level that you would be forced to exit….you can not stay in the long trade longer
So, the next time you are trying to play this game just remember that behind the Stock exchanges there is a massive graveyard of traders who took positions in the opposite direction and never recovered from their losses. So consider yourself warned.
Key Takeaways
Meaning:
- Stock markets can behave irrationally due to factors like greed and fear.
- The common belief is that this irrationality is short-lived, and normalcy will return.
- However, the reality is that market irrationality can persist for longer than expected.
Example:
- During times like the Covid pandemic, markets fell continuously, defying expectations.
- Similarly, in bullish phases, markets may climb without regard for valuations.
Implication for Traders:
- Short-term traders face risks when going against market trends.
- Unlike long-term investors who can wait for recovery, traders may face financial strain.
- The proverb warns that markets may remain irrational longer than a trader can withstand losses.
Caution:
- Traders should be cautious about opposing prevailing market directions.
- The term “solvent” refers to a trader’s financial capacity; losses can force an exit.
- Many traders have faced significant losses for taking positions against the prevailing trend.
Lesson:
- The proverb serves as a cautionary reminder to traders about the endurance of market irrationality.
- It emphasizes the importance of aligning trading strategies with market trends.
- Traders are advised to be mindful of the risks and avoid positions that may lead to financial insolvency.
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Markets Can Stay Irrational ...
In this series of stock market proverbs, I have another gem to share with you guys and this one is specifically for traders. It goes like this…
Markets can stay irrational longer than you can remain solvent.
Now, what does it mean?
Stock markets are known to be irrational. We all know how greed and fear can make the market do crazy things.
And it is broadly assumed that this irrational behavior is short-termed and that sooner or later sanity prevails in the market.…and life goes back to normal.
But the reality is that the irrationality in the market can stay longer than you think.
Think back to the Covid time when the market kept falling day after day and every time we thought about how much more can it fall, it fell down some more… don’t know how many of you were there but was like a free fall…there was no bottom.
The same is true on the bullish side…look back at any stock market bubble and you will see the market climbing up month after month with no care for valuations or gravity.
Now, when the markets are behaving illogically, we say to ourselves that “hey, how much more can this craziness go on…at some point it has to stop, right?
So, in this so-called rational frame of mind, we do things opposite to the market direction. When markets are falling we buy and when markets are going up we sell.
Now, if you are a long-term investor, your mistakes would be forgiven because time is on your side. Right, if you bought a few stocks for bottom fishing but they kept tumbling down, you may have to hold on to them for maybe a few more months or years but eventually, you will be fine.
But if you are a short-term trader, then you get no mercy from the market. Why?
Because markets can stay irrational longer than you can remain solvent. Solvent means your capacity of risk tolerance is over…the losses will increase to such a high level that you would be forced to exit….you can not stay in the long trade longer
So, the next time you are trying to play this game just remember that behind the Stock exchanges there is a massive graveyard of traders who took positions in the opposite direction and never recovered from their losses. So consider yourself warned.
Key Takeaways
Meaning:
- Stock markets can behave irrationally due to factors like greed and fear.
- The common belief is that this irrationality is short-lived, and normalcy will return.
- However, the reality is that market irrationality can persist for longer than expected.
Example:
- During times like the Covid pandemic, markets fell continuously, defying expectations.
- Similarly, in bullish phases, markets may climb without regard for valuations.
Implication for Traders:
- Short-term traders face risks when going against market trends.
- Unlike long-term investors who can wait for recovery, traders may face financial strain.
- The proverb warns that markets may remain irrational longer than a trader can withstand losses.
Caution:
- Traders should be cautious about opposing prevailing market directions.
- The term “solvent” refers to a trader’s financial capacity; losses can force an exit.
- Many traders have faced significant losses for taking positions against the prevailing trend.
Lesson:
- The proverb serves as a cautionary reminder to traders about the endurance of market irrationality.
- It emphasizes the importance of aligning trading strategies with market trends.
- Traders are advised to be mindful of the risks and avoid positions that may lead to financial insolvency.
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