In a bull market, it seems that everyone is making money, but it is actually a beautiful trap. Investment guru Graham once said: The bull market is the main reason why ordinary investors lose money.
Let’s discuss in detail the operating rules behind the financial markets and the behavioral economics principles involved.
1. Most people will end up losing money
First of all, as long as it is venture capital, whether in a bull market or a bear market, most people will eventually lose money and leave the market. This is an eternal law that has never changed.
So why is it more dangerous to invest for the first time in a bull market?
Because in a bull market, as the market goes up, everyone is making money. This rapid accumulation of wealth will attract a large number of newbies to enter the market.
For novice investors who have never bought cryptocurrency before, especially when they hear about a relatively large wealth effect, such as a certain coin increasing 100 times in a short period of time, and have no knowledge of the financial market, they watch their friends around them start to make money and follow suit to buy in. It is almost inevitable that they will suffer losses in the end.
They have little experience in traditional stock investment, but they rush directly into the highly volatile market such as cryptocurrencies. This is why I never recommend people around me to speculate in cryptocurrencies, and I don’t give investment advice to people who haven’t paid.
There are two reasons for the loss: timing of entry and irrational behavior.
The timing of entry means that most people start to pay attention to the crypto market in the middle or late stages of the bull market. For example, at the moment, some friends in traditional finance ask me simple questions like what is an encryption algorithm and why Bitcoin is valuable.
Because my Sober chat options knowledge planet actually has quite a few A-share and US stock options players who are not familiar with cryptocurrencies.
At this time, the market is already at a relatively high level. No one thinks that the current odds of Bitcoin are still high, right?
Irrational behavior refers to irrational decisions such as chasing rising and falling prices, frequent trading, and emotional behavior, which will lead to greater investment losses.
1. Timing of entry
Investors always think they can buy at a low point and then sell at a high point to make a fortune.
But in fact, during the crypto bear market in October last year, bloggers from certain builds actually started posting inspirational articles.
Currently, BTC continues to rise sharply, breaking through previous highs several times and entering the middle of the bull market. However, some new players are rushing into the market, but what awaits them is most likely not continued rise, but sideways or a sudden plunge.
Therefore, late entry into the market is an important reason for losses.
2. Irrational Behavior
There are many irrational behaviors in investment. For example, everyone knows that you should buy low and sell high. Buy more when it is cheap, and sell appropriately when it rises to a high level. But in the market, most people do the opposite, actually selling low and buying high.
The position structure of a novice investor is similar to an inverted pyramid. They start by investing a little money to test the waters, and then start to invest more capital after they find that they are making money. (As shown in the figure below)
When the market starts to fall, the investment cost will be raised and losses will soon occur. After the loss, people will say, this is a scam, and they will never touch stock funds again.
But the market will not continue to fall. When the bull market comes again, everyone around you will be investing in stocks, and you may even see your colleague sitting next to you earning your year's salary in one month by investing in stocks.
At this time, you are no longer calm, fearing that you will miss this opportunity to make a fortune.
At the beginning, you just tested the waters and invested 10,000 U, and soon earned 100%. You regretted that you invested too little capital, and continued to invest 100,000 U, and soon earned 100% again. The continuous profits made you full of confidence, so you sold your house and bought various altcoins.
Sooner or later the market will turn downward, and not only will all previous profits be lost, but even the down payment will be lost.
You may ask, did such a plot really happen?
I would say yes, it happened in the traditional financial market in 2007 and 2015. Why am I so familiar with this plot? Because I have been in the industry for a long time.
On the contrary, if it is a bear market, the market is falling all the way, and the risk is smaller because you will control the principal invested and invest cautiously, so you will not lose too much at this time.
The above example is a typical investment journey of a novice. We will find that the novice who originally had no intention of entering the market, seeing people around him making money, can't help but follow suit and invest in the stock market.
This is called the herd effect in psychology, which means that when an individual is influenced by a group, he or she will doubt and change his or her own views, judgments, and behaviors in a direction consistent with the majority of the group.
Most of the time, the herd effect can help us survive and integrate into this society. But in the financial market, herd effect is a poison and a dangerous behavior that leads to investment losses.
In the financial market, there are its own rules of the game. Before you play this game, don't think you can resist the temptation of human nature. Because you don't know to what extent your greed and fear will be magnified by the market.
2. How to reduce losses
If you are a novice investor and encounter a bull market that only comes once every few years, here are some suggestions.
Don't leverage.
No matter how confident you are about the market, don't borrow money to invest, because if you make a mistake once, you will lose all your capital.
Invest your spare money and control the principal you invest.
The market cycle of cryptocurrencies is very short, generally with a halving cycle of 4 years, so the principal of the investment is at least idle money that will not be used within 4 years.
Try to avoid losses.
When investing for the first time, the most important thing is not how much money you make, but to avoid losses, or to lose as little as possible.
It is extremely difficult to make a profit the first time you enter the market. The masters who can make long-term profits are all experienced veterans.
Finally, investment philosophy cannot be passed from one person to another. You can only get it through your own time and hard work.
No matter how much I say above, it is not as real as experiencing a loss in person. If the tuition fee has to be paid sooner or later, then it is always better to experience it earlier than later.
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