A podcast -listener asks:
If there are no iron laws in markets and nothing forever works as an indicator, is studying the stock market perhaps useless?
There are no rules that apply to the stock market that work every time.
If that were the case, everyone would do them, and investing would be easy.
I said that nothing always works, that doesn’t mean nothing ever works.
Studying the history of the stock market shows that although the future does not always look exactly like the past, some general rules of thumb can help you to be a better investor when you are applied by a consistent process.
Here are some of my iron laws of the stock market (even if they don’t always work):
Volatility is on average reversed. Periods of high volatility are inevitably followed by periods of low volatility and vice versa.
The stock market would not offer a risk premium compared to other activa classes without any volatility, but it cannot take forever. Good leads to bad and bad leads to good … ultimately.
It must be whether the stock market would cease to exist in its current state.
Buy when the stock market crashes. I love stock market crashes because this means that you can invest at lower prices, lower currencies and higher dividend yields. And that usually means a higher forward return.
Can you tim the bottom? No.
Could the market crash even further? Certainly.
What if it never comes back? If that happens, we have much bigger problems.
Diversity is your best hedge against extreme events. Most shares smell. A small part of the shares is good for the majority of the long -term profit.
Many shares crash and never come back. Some stock markets on the land have performed terribly for decades.
The best way to prevent catastrophic losses and to survive the stock market is to diversify your participations over different regions, market hoods, sectors and the number of shares you have.
Diversification does not guarantee incredible results, but it helps you to stay in the game.
Your biggest lead is not data -driven but behavioral. Try not to get the market too smart. Try to prevent you from being too smart yourself.
The stock market sometimes has to crash. This is a function, not a bug:
No pain, no profit.
The market is difficult to beat. It can be done. Most people can’t do it. Invest accordingly.
The risk never disappears completely. There are considerations with every investment position.
If you put all your money in stocks, your expected return will increase, but that also applies to your chance of large losses and bone burning volatility.
If you bring all your money in cash, you can lose and bypass Volatily, but your expected returns go down.
If you have a balanced portfolio, you will always be irritated by certain strategies or asset classes when they are left behind.
Risk changes shape but has never been extinguished.
Average reversal and momentum are here to stay. Some investors continue to lose shares in the hope that they will return to their original price. Others double the shares that go up and crack the losers.
Some investors respond to market -moving events, while others respond exaggerated. Some go with the crowd, while others are Perma Operationals.
Anxiety, greed, recklessness, recent and confirmation proposal can cause investors to stack and out and lose shares in one go.
Human nature means that the pendulum from one set of emotions to another, depending on the price action.
Trees can be very long, but they don’t grow to heaven, so common reversal and momentum will always be with us in one way or another.
Extending your time horizon increases your chance of success. The stock market is the best casino on Earth because your chance of success increases, the longer you will remain invested.
Markets ultimately punish certainty. Nobody sorted it out all. As soon as you think you are doing the market, you remind you that there is no such thing as easy money.
Michael and I talked about how nothing works and some iron laws of the stock market on the video of Animal Spirits of this week:
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