This is one of the most interesting graphs I have ever seen. It shows the emotions that we all go through when we are in boom and bust financial investment markets.
Read my story about boom and bust!
This is the Trimark Analysis of this cycle of boom and bust and the feelings that go along with it.
The internet, the stock market boom and CNN all led people to believe that wealth creation was easy and everyone could do it cheaply and effortlessly. The truth is, there is no easy way to accumulate assets and there is no “new paradigm” that eliminates the possibility of a recession or stock market crash.
Under-performing managers like Trimark and Templeton were vilified in the press as recently as early September 2000, only to be vindicated by the precipitous drop in the world stock markets in late September 2000. Markets around the world have fallen anywhere from 12% (Canada) to 60% (NASDAQ). The good news is that Alan Greenspan, of the US Federal Reserve, has taken quick and decisive action by dropping interest a full percentage point so far this year, with more cuts likely to come in the weeks ahead. Lower interest rates encourage consumers to buy big ticket items like cars and refrigerators, which in turn make companies more profitable. Changes in interest rates take some time to work their way through the economy, however, it does appear the US economy in particular, should pick up speed in the 3rd or 4th quarter of this year.
This would seem to indicate that we are now very near the bottom of the stock market cycle. Although predictions of this nature are a fool’s game at best, we feel the worst is behind us as far as stock markets go and expect that virtually all world stock markets will finish the year up from their current lows.
In any case, through all of the turmoil, we have rediscovered that time in the markets is the way to success - not timing the markets. And we will continue to recant this mantra with renewed fervor!
This chart shows the cycle of emotions people
go through when investing in the markets.
Long term thinking is key!
Understanding not only the cycle but the
emotions that go with it can help equip
investors to tolerate and benefit from market
The Cycle of Market
Emotions “Maybe the markets just aren’t for me.”
“Wow, I feel great about this investment.” “Temporary setback. I’m a long-term investor.” Maximum Opportunity Maximum Risk
Expectations are high
• Optimism drives every investment
• Your expectations become reality; excitement, thrill
and euphoria take over
• You reach the point of maximum financial risk:
Your confidence is very high
Nothing lasts forever
• Soaring markets will level off, bringing on feelings of anxiety,
denial and outright fear
• As markets fall, next up are desperation, panic, capitulation
• Depression sets in: You begin to question your place in the
Long-term thinking is key
• Review your original objectives and remember that you’re
investing for the long term
• Keep in mind that market downturns can result in maximum
A brighter future
• Markets begin to normalize: Hope and relief emerge
• Prospects for a brighter future encourage optimism once again
Investing can be a highly emotional experience. This outline of market emotions can help you take a rational approach to maximizing
market fluctuations. Now’s the time to build a long-term investment strategy with your financial advisor – a strategy that will carry you
through the cycle of market emotions.
In the end, by anticipating and understanding the series of emotions that you may experience, you’ll be better equipped to tolerate and
benefit from market fluctuations.
This is a great synopsis of the Nortel Story
This is my story when it comes to my stock market investments.
I remember well, my feelings of being left out when Nortel was rocketing toward $100 per share. The optimism and excitement was unprecedented. I said to myself "I have to get on board and ride the wave", so I did, at $97 per share. As the share price continued to escalate, my feelings were euphoric. I felt like I was on top of the world and could do no wrong. Then the scandals of Enron, BRE-X and rumours of lost contracts caused Nortel and the rest of the markets to plummet and had many of us panicking and falling into deep depression over our losses.
I compounded my loss even further by purchasing more Nortel stock as it fell, bought at $84, $62 and $30 something, don't even remember now, just trying to cut my losses when it rebounded. Fool I am. Now we are into 2005 and feelings of optimism and hope are beginning to abound. When Nortel was hovering at $1 per share, I could have purchased a few hundred shares, that way when it returns to even $25 per share I will have covered my losses. But, I did not purchase any more Nortel.
As of December 31, 2004, Nortel trades at $4.18 and I do not plan on purchasing any more Nortel stock, regardless of the price. I am still licking my wounds from the last loss. I just look forward to the day that it reaches $200 and then I can think about retirement. In the meantime I will stick to something that I know about, am sure it will increase in value over time and trust in the long run, that is, real estate.
WORDS OF WISDOM
Back in January 2001, we asked Max Ansbacher, leading authority on S&P 500 options, his opinion as to on whether investors should hold or sell stocks that they thought were too low to sell. Concerning a stock’s price being too low, Ansbacher’s incisive reply was:
“This thinking is mistakenly looking backwards at the excessive earlier stock prices as guidance as to where they are likely to be in the future. This makes no more sense than it would have a year ago to say that because a certain stock had gone from 7 to 172 it was really only worth 7. Obviously, it was clearly undervalued at 7, just as it may have been greatly overvalued at 172.
“The correct way to estimate where a falling stock market may go is to base your judgment upon past market valuations. The most basic valuation is the P/E ratio, and a very reasonable assumption about a declining market is that it could easily fall to the P/E ratio that has been its norm over the past sixty years.
“In short, there is a very compelling reason for selling stocks now: To avoid the tremendous risk still lurking in these stocks that they will fall much further as they seek to return to their long-term P/E ratio.
“Two additional comments. As the economy slows and earnings are cut, the E in the P/E will become even smaller, meaning that our loss estimates would become too conservative. Second, we are projecting only to the average P/E over the past 60 years. All real bear markets, almost by definition, don’t stop until they go significantly below the average P/E. With the average being about 15.5 for the S&P 500, we leave it to your imagination as to what a low figure would be. Certainly far lower.”
My two cents worth
I think that Trimark and most of the other investment companies have put together this graph to make us all feel a little better when our stock prices fall or plummet. They also lead us to believe that when our stocks or the market in general has dropped that this is a 'buying opportunity' that we should not pass up. Either way the investment companies and brokers continue to get rich off us as we buy and sell stocks and investments when they tell us to. Of course, we don't have to buy or sell our stocks, but the emotions in the cycle are sometimes too difficult to ignore!
As of November 2014 the DJIA sits at an all time high of 17,390.52 and the TSX at 14,613.32 off it's all time high of 15,685.13 back on September 3, 2014 - stock markets have performed exceptionally well since about May of 2012 and about double since the extreme lowest point in the last decade in March of 2009 - see the chart below showing the TSX and the DJIA comparison over the past 10 years
Again, stick to investments you know and trust.
Shall we begin your real estate or investment property property purchase?
critiques and your opinions are always welcome
Questions? Or need more information? Send Mark an E-mail or phone him at 905-828-3434
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