The crisis of 2008, which still continues in some form or the other, has several lessons for investors. One that stands out is - things that have never happened before are bound to occur with some regularity. In short, you as an investor must always hope for the best but remain prepared for the worst. After all, those who have believed in the concept of 'this time it's different' in the past, have paid heavy price for their actions.
You know, every bull brings with itself a huge wave of hope. Hope that stock process will never fall in price again. Hope that one can become extremely wealth flipping stocks - buying into any hot tip and selling it for a huge profit. Each time! For each trade!
The scariest part is that this huge wave of hope is not restricted to a few investors. Rather, it takes the form of a rate race where every investor is sure about making bigger returns than his friend, or relative or colleague! All this takes stock prices sky high, and thus the race becomes self fulfilling.
It is then that investors start thinking - "This time it's different...the bull market will never end." After all, the wealth effect fades their memories.
Just then, things that have never happened before (as per the memory!), occur. Stocks crash! But investors continue to believe that this is just a passing phase. Stocks fall 30-40-50%! But the hope remains.
And then stocks fall even more...70-80-90% from their highs! This is when all hell breaks loose. Stocks bought at astronomical prices are sold at these levels. Investors thus end up with deep cuts in their portfolios. Then they begin to think again - "This time it's different...the bear market will never end!"
And the cycle continues...
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