If Bulls & Bears Make Money, Who Gets Slaughtered?
BY SUMMIT CAPITAL #INVESTING POSTED ON 9 SEPTEMBER 2015
"Bulls make money, Bears make money and Pigs get slaughtered" is an old Wall Street saying that warns investors of excessive greed and impatience.
As you start to invest, you will soon hear these terms and discover that some of us adopt distinctive animal-like personalities when it comes to investing, which often mean bad news. The good news is, lousy habits are simply regular patterns manifested overtime but preventable when detected early. Our job is to expose the D-list (lets just call them The Farm here) of furry friends so that you can ride the Bull and tame the Bear to stay in the game.
The term of a "Bull" originates from the way it attacks their opponents. A Bull thrusts its horns up into the air and this action is a metaphor for the movement of the market. When the general trend of a market is heading up, it is called a Bull Market. Typically in a bull market, the overall economy is doing great. Employment rate goes up. The Gross Domestic Product is rising and consumers are spending. Stock prices typically increases so it is easier to buy low and sell higher at a later stage; earning a nice profit along the way. But beware of a market reversal. It can get tricky when the overall positivity of the market becomes overwhelming and investors are dangerously buying overvalued stocks, pushing stock prices to dizzy heights. That is when a bubble burst occurs. Thus, if a person is optimistic and believes the stocks will rise, they are labeled as a "Bull" and is said to have a "Bullish Outlook".
The opposite is true for the Bear. A "Bear" attacks its opponents by swiping down and this action is used as a metaphor for the market movements when the general trend of a market is heading down. This is called a Bear Market. Typically during a Bear market, there will be widespread pessimism and investor sentiments are fairly weak. Recession is looming and stock prices are on a steady decline fashion. On the surface, it makes no sense to invest during a Bear Market. However, one fairly common practice experienced investors use to make money during this period is a technique called short-selling. Waiting on the sidelines for the Bear to near its end and riding the reverse on the Bull to profit is also another strategy that is commonly used. If a person is pessimistic and believes the stocks will drop in prices, they are labeled as a "Bear" and is said to have a "Bearish Outlook".
The Chicken: Also known as the benchwarmers. You find them investing in ultra-safe instruments that takes a heck of a time to bear fruit; which normally loses out to inflation over a period. They do their homework and are typically well-informed investors but tend to cripple with fear, sit on the sidelines and pass on great money-making deals. While it is true that we should never invest in something which we will lose sleep over, we are also almost guaranteed to never see any real returns on our investments when we allow fear to shape our thoughts and rule our emotions. Learning to take risks and risking it all is totally different. The key to score in investing is in learning to take bigger (calculated) risks and work on better ways to manage those risks at the same time.
The Pig: Now the Pig is the complete opposite of the Chicken. These eager beavers are always sniffing for a quick buck (get-rich-quick-opportunities) and neglect any form of due diligence. As a result, they pay more than profit in the long run. Ruled by pure greed, they invest with blind faith and occassionally hit the jackpot in one or two occasions. But the odds always favor the house and we all know what happens sooner or later.
The Penguin: At first glance, they seemed like avid investors but the Penguin is no more than a blind follower. They invests in whatever the majority (a.k.a. the herd) says or do with no concept of individual assessment and risk management. Clearly, the Penguin overlooks the fact that one man's meat is another man's poison. So whenever the herd screams, "Buy Now! Stock ABC will go up by 37% within 3 months!", the Happy Feet jumps right into it with false optimism. This dangerous belief also causes most people to act on impulse when the uptrend is nearing its end and more often than not, there are no happy endings.
The Porcupine: Reclusive by nature, the Porcupine is best described as cynical individuals with solitary beliefs. They shun away (almost instantly) from the idea of passive income, believing that it will never work for them and that investing will do more harm than good. They swear only by working hard in a job, drawing a steady salary and keeping their savings in the banks is the one path to financial freedom. So the question is how do they lose their money by not learning to invest at all? Yup, you guessed it right, inflation; or worst, retrenchment.
"Life is inherently risky. There is only one big risk you should avoid at all costs, and that is the risk of doing nothing" - Denis Waitley
The Dog: They are your overly attached bunch who faithfully hold onto a stock till the cows come home. Exiting on a losing position is never an option to the Dog. And you are probably wondering why on earth would anyone do that, or in this case, not do anything about it? For obvious reasons, they simply don't have a trading plan and fail to consider all possible outcomes when entering the market. Well guess what? Hope is not a strategy and it gets people slaughtered. There is a better chance at succeeding by sticking to a well defined trading blueprint and do what is necessary even in uncomfortable situations. When it comes to trading, cutting your losses short goes a longer way. So analysis your strategy; or more importantly, make sure you have one.