Those who can endure extreme volatility are those who are most likely to taste the extreme success at the tail end.
One thing all human beings cannot escape is emotion. We “feel” the world in every waking moment. A beam of sunshine brings us joy and a gust of wind might make us frown. Chatting with our close friends makes us happy while speaking with an opponent could bring stress and anxiety. There is rarely a neutral moment. We always feel something.
The emotions are augmented when it comes to financial matters. Price volatility brings emotional volatility. To 99.99% of the population, money is a scarce resource and it doesn’t come by easily. What is more challenging is that both saving and investing are anti-human nature. Saving requires us to delay what we can enjoy today to some day in the future. It requires us to moderate our spendings. Investing is worse as it requires fighting your instinct at every stage of the investment process. To be a good investor, you need to dare to invest when the market has nosedived, hold on to the position when the situation is hopeless, and eventually know when to take profit when it looks like it can go up more.
Let’s take a look at the emotional cycle of an investor.
Fear – know when to invest. Many will buy $40k bitcoin without a blink but how many bought it when it dropped to $3k on 12 March 2020? When markets fall, we freeze. Generational wealth is often made by investing in a bear market, rather a bull market. Many know, but people who actually have the emotional strength to pull the trigger in market downturns are still rare species.
The boredom, the doubt, the disbelief – hold on to a position. Good investment is rarely a smooth ride but more a rollercoaster ride. Good investments will not go up a little every day like your deposits in the banks (let’s assume we live in a world with a positive real interest rate). It might stay low for a considerably long time, it might take a dive from your entry point and force you to re-examine your decision to enter in the first place, it might also try to give you a heart attack by going up and down wildly. It is pure suffering.
Greed – know when to exit. This might be the most difficult stage of investing— Know when is enough and leave the table. And enough is different for EVERYONE. We all have different aspirations, investment horizon and risk tolerance. When things are going well, we tend to ask, what if it goes up even more while forgetting the probability of the price going down could be just the same, if not higher.
Nothing is free. Volatility is the price of wealth creation. But even people who think they are willing to pay the price often get cold feet at all the critical moments.
And life is the same. Extreme volatility often stimulates extreme creativity and greatness. Luck favors the mighty hearts.
Dreamerella 