21 Aug Playing the Line vs Playing the Field
As a young stockbroker I was fascinated by the price movements of different stocks. Still am.
For hours on end I devoured and studied countless stock charts looking for something that had either been oversold or overbought. It was like the treasure hunt that never ended.
For the uninitiated, price charts are like weather reports. They provide a snap shot of what’s happening in the market. Is it cheap or expensive, hot or cold?
Eventually I applied my analysis to other markets including currencies, bonds and commodities and to my surprise, one very clear insight began to emerge – the weather may vary, but the seasons never change. In other words…
Everything cycles and extremes never last.
Very simply, everything has its own equilibrium point. Meaning, markets will always oscillate around the middle, regardless of their highs and lows. It’s what I call ‘playing the line’. I.e. anything that is too expensive or too cheap will always revert back to the centreline again.
Yes the good assets will appreciate in value over time just like a plant reaches for the sun. It’s nature’s way. However, when extreme conditions are present, either overbought or oversold markets, they never last. Extreme weather conditions are exactly the same. That’s why Bitcoin and all the cryptocurrencies will experience a major correction, the conditions are extreme!
Why Every Market Is Bipolar
Every market is just an amalgam of human emotions. The actual asset becomes irrelevant because they are still traded by emotional beings. For that very reason, markets experience both extreme highs (mania) and extreme lows (depression).
Consider these two examples.
When someone overeats, they often ‘slingshot’ to the other side and deprive themselves. Then after a few days of deprivation they slingshot the other way and binge to ‘balance’ how they feel.
The gyrations continue until he or she can find a happy medium again. Make sense?
The markets are exactly the same. An extreme high will always be equilibrated by an extreme low and vice versa. Like every relationship, infatuation always leads to resentment and back again until the middle is found. Bipolar is all around us.
Playing the Field
When markets are hot and manic, participants typically talk everything up and onlookers talk themselves in. The fear of missing out (FOMO) becomes too much and it pushes the market even higher.
To justify their actions, buyers say things like, “this time it’s different”. Consequently, they deviate from the line and play the field instead, thinking they’ll be safe.
The same happens when a market tanks. Sellers can’t get out fast enough. They convince themselves the end of the world is nigh and it will never get better again. They become depressed and promise themselves, ‘never again’. (The same thing happens with food, alcohol, careers, relationships, exercise, etc).
Eventually the experience becomes too painful and the only attractive option is to get rid of the thing they wished they never ‘contracted’ (agreement) when things were hot and exciting. The problem is, it becomes too embarrassing to talk about as well. That’s what happens when you stray and don’t play the line. You end up with something you wished you never touched.
Emotions create irrational behaviuor. That’s why people buy when the market is expensive and sell when the market is cheap. Fear, greed and panic take over.
Put another way…
Things are never as good as they seem nor are they as bad as they seem. Instead they’re somewhere in between.
Manic markets always correct and depressed markets eventually recover.
Water always find its own level.
Thanks for dropping by.
Back Paddock – “Every adversity, every failure, every heartache carries with it the seed of an equal or greater benefit”. – Napoleon Hill