Beat the Market Bears and Bulls
75 million people buying anything will cause a boom…
The stock market boom from 1990 to 2000 was caused by demographic changes. There were so many baby boomers entering the stock market, saving for their retirement in their pension plans.
There was a similar boom in the 1970s when boomers left home, left college, and began buying their first home. Interest rates were raised to slow down inflation, which was caused partially because 75 million baby boomers had entered the job market and now had money to burn.
The reverse is also true — 75 million people selling anything will cause a bust…
We’ve seen this happen in 2021 in the crypto market when Elon Musk tweeted Tesla would no longer accept Bitcoin and a huge selloff happened. And then again in February when the Reddit warriors started buying GameStop stocks to “stick it to Wall Street.”
The problem with the mania is, no matter who wins, someone will get hurt.
That’s why in today’s market, it’s urgent that you get financially educated…
Understanding the Madness
The losers left holding the bag could be everyone who placed their money in the hands of the hedge funds… just so they wouldn’t have to take the time and energy to get financially educated.
Or it could be the emotional Reddit warriors who saw a great opportunity to buy low and sell high because they didn’t take the time or energy to get financially educated.
When there is madness and everyone is thinking about getting rich quickly in the market, it’s usually just a matter of time before many people lose everything.
Often this is because people start investing in the markets with borrowed money, instead of first investing in their education and experience. When that happens, many people panic. Of course, that is when educated investors become wealthy, profiting off the madness of others.
That’s not to say crashes are bad, but the emotional panic that occurs can be. The problem with uneducated investors is that they don’t understand real bear markets or real bull markets. So how would they know what a market crash feels like, especially if it goes on for years?
That’s why the new area of investing, crypto investing, is so dangerous without education. It’s hard to find a good teacher because so few have enough experience and comprehension of volatile markets.
Why Markets Will Crash Faster in the Information Age
In his book The Lexus and the Olive Tree — which I recommend for anyone the current era of global business — Thomas L. Friedman often refers to “the Electronic Herd.”
The Electronic Herd is a group of several thousand, very often young, people who control great sums of digital money. They are the individuals who work for large banks, mutual funds, hedge funds, insurance companies, and the like. With a click of their mouse, they have the power to move trillions of dollars from one country to another country in a split second. That power gives the electronic herd more power than politicians.
I was in Southeast Asia in 1997 when the electronic herd moved their money out of countries like Thailand, Indonesia, Malaysia, and Korea, virtually sinking those countries’ economies overnight. It was not a pretty sight, nor was it pleasant to be physically present in those countries at that time.
Thomas Friedman wrote in his book:
“Think of the Electronic Herd as being like a herd of wildebeests grazing over a wide area of Africa. When a wildebeest on the edge of the herd sees something move in the tall, thick brush next to where it’s feeding, that wildebeest doesn’t say to the wildebeest next to it, ‘Gosh, I wonder if that’s a lion moving around there in the brush.’ No way. That wildebeest just starts a stampede. And those wildebeests don’t stampede for a mere hundred yards.
They stampede to the next country and crush everything in their path.”
That’s what happened to the Asian Tigers in 1997. When the Electronic Herd didn’t like what they saw going on in the area, they moved out overnight. It went from high optimism to riots and murder in a matter of days.
It’s my prediction that market crashes will come faster and more severely in the Information Age.
As I said above, crashes aren’t that bad, but the emotional panic that occurs is. The problem with new investors is that they have not yet been through a real bear market, so how would they know what a market crash and a bear market feel like, especially if it goes on for years?
As with many things, those with experience are in the position to win.
Rich dad put it simply: “It’s not possible to predict the markets, but it is important that we be prepared for whichever direction it decides to go.”
He also said, “Bull markets seem to go on forever, which causes people to become sloppy, foolish, and complacent.”
Today, times are pretty good for investors. The question is, are you ready for the next bear market? Because it will come, and while it’s easy to make money in a bull market, only qualified investors will make money in the next bear market.
Don’t Be a Risky Investor
My rich dad said, “one of the basics of being a good investor is being prepared to profit when the market moves up or if it moves down. The best investors make more money in a down market simply because the market falls faster than it rises. As the saying goes: ‘The bull comes up the stairs, and the bear goes out the window.’ If you are not covered for either direction, you as the investor are too risky—not the investment.”
A risky investor invests based on opinions. Unfortunately, this describes most investors. Since most investors invest for capital gains, their investment decision is based upon opinions about the future. Many investors invest in mutual funds based upon the opinion that the stock market goes up 8% to 10% per year. If the opinion is wrong, they lose.
A smart investor knows the difference between facts and opinions. Generally, a person who invests for capital gains is investing on an opinion. A cash flow investor invests for facts. If possible, a smart investor will invest using both opinion and facts, and invest for both cash flow and capital gains.
If you’ve got money in stocks, mutual funds, real estate, or business, ask yourself — is the investment decision based on facts or your opinion?
If it’s just your opinion… watch out for the next stampede.
Play it smart,
Editor, Rich Dad Poor Dad Daily