In the market alone (II): Cycles and psychological warfare

We continue with the second chapter of the book One Up On Wall Street written by Peter Lynch.

"Looking back at the past, it is seen that there is cyclicality in stocks as well. After the stock market crashes, many people stay away from the stock market for a long time or hold a grudge against it, but when the stock market starts to gain value again, many people see this as an opportunity and start investing. The problem here is this: many stocks lose a lot of value after the stock market crashes, then the markets begin to recover and stock prices start to rise. However, people start investing only after stock prices have already risen. What a winning investor needs to do is to take the risk and invest during the times when the stock market is down/crisis times."

We see that similar cyclicality exists in the crypto sector as well. If you examine the charts from a temporal perspective, it is quite possible to see recurring patterns. Many people are questioning when the bull will come, but those who invest during the times when the markets are at their deadliest and everyone is disillusioned have already started to experience the bull market. Therefore, by researching the cyclicality in the exchanges, you can make long-term investments.

Is it possible to know the dip or peak point?

On the other hand, Peter Lynch emphasizes that everyone believes they are smarter by acting with reverse psychology. "A crowd has started to believe that they can sell when everyone expects a rise, and buy when everyone expects a fall. Although individuals have an insight that they are better than everyone else, in reality, everyone thinks like them. The person who truly possesses reverse psychology is the one who can buy at the lowest point of the market and sell at the highest point." We also addressed this topic in our article about cognitive biases. You can check my article titled "In crypto, selling when others are buying and buying when others are selling". Firstly, many people tend to believe that they are smarter, have solved the market faster than everyone else, and have a higher potential than others. The irony of so many losers in a place where everyone is very good shows the paradox of the situation. Secondly, it is never possible to know the exact bottom or peak; someone who claims to know is either lying or has been lucky. Thinking that you can buy at the lowest point and sell at the highest is an irrational option. What should be done at this point is to adopt gradual buying and selling strategies and strengthen your trading skills. This way, you can reduce your costs in purchases to get closer to the lowest point, and by pulling your selling point higher, you can increase your profit amount.

Someone must incur losses for others to profit.

"An inattentive investor goes through three emotional stages: anxiety, happiness, and surrender. First, they worry that the stock market will fall or that the economy will worsen, and thus do not buy the appropriate shares at the right price. Then they buy these shares at a high price and are happy because prices have risen. Finally, when the value of their shares decreases, they give up and sell them at a loss." If we were to add something to this, afterwards, the same investors claim that this sector is nothing but a fabrication, serving no purpose other than fraud, and criticize those who invest in this sector, leaving negative comments. However, when the existing situation is examined from a rational perspective, some must incur losses so that others can profit.

The Importance of Alternative Action Plans

During a time when everyone is excessively anxious, you should reconsider your buying decisions, and during times when everyone is excessively happy, you should reevaluate your selling decisions. The part about giving up represents investors who hold the belief that "One day it will turn around" and remain stagnant for a long time filled with nerves and stress. For example, it took a trader who bought XRP at its peak in 2018 seven years to break even... On the other hand, a person who bought Solana in 2021 only waited three years. As you can understand, a smart investor should actively manage their portfolio, prepare alternative action plans for themselves, and know how to cut losses after a certain level instead of acting solely on emotions and waiting years with losses after giving up.

Is there a need to try to catch a falling knife?

"There are some common thoughts held by amateur and careless investors in a similar vein," "It can't go down any further after dropping this much," "The stocks of good companies will eventually rise," "The stock market requires patience; this decline cannot scare us," "The lowest price a stock can reach is known in advance" are phrases often used by amateur investors, but just as there is no limit to rises, there is also no limit to declines. Many amateur investors try to buy a product that is starting to fall, thinking they can predict its lowest price, but this is like trying to catch a falling knife. In fact, it would be a much more sensible move to pick it up after the knife has stuck into the ground. As individuals try to add more goods from below and lower their costs while prices continue to drop further, they can incur enormous losses. Therefore, it is a much more rational strategy to add a product that is starting to decline to the portfolio after observing it for a while and following news related to the company. Transactions should not be made solely based on price movements; you also need to follow news and the company's projects.

"After this much has been achieved, it cannot go up any further." Trying to predict how much a stock can rise is quite meaningless because there is no end to the price increase of its shares as the company continues to improve its products, develop itself, and make new investments. For example, the prices of NVIDIA shares continued to rise as investors kept saying, "It will drop from here." As we all know, this also positively affected coins related to artificial intelligence. In summary, as long as the company's situation is good, there is no logic in selling off, and the product's price can continue to rise. At the same time, if you think about the profit percentage missed by those who make early sales in a place where many professionals claim it will drop, you can actually understand what Peter Lynch was referring to with his first recommendation.

This article does not contain investment advice or recommendations. Every investment and trading action carries risks, and readers should conduct their own research when making decisions.