is investing in down markets so difficult?
Since profiting in
a down market requires the investor to move money into new
strategies prior to the top, one must be willing to "lose
money" in the prior cycle. This can be costly due to
the lack of fortitude and impatience of the investor. If the
movement of money to the new strategy pays off quickly, the
investor is satisfied that they made the right decision. If
the change produces immediate losses, the investor begins
to question their decision. The longer the wait, the harder
the emotional pull to punt the new strategy and go back to
prior investments. Only through reviewing the skill of the
manager, based on his strategy, and accessing whether the
environment for that strategy is or will be in place, can
an investor determine the need to fire a manager and move
on. The easiest and most common response is to react emotionally
which inevitably proves to be the most costly response in
the long run. The hardest move, that has proven to be the
most rewarding for investors over time, is to thoroughly research
the skill and environment variables and act accordingly.
As humans, we know
that bear markets bring more than investment losses. Emotionally,
we are more comfortable believing that the "good ole
days" can go on forever. Most of us tend to procrastinate.
Additionally, in bull markets, investors come to believe that
substantial losses cannot occur. The longer the bull market
goes, the more likely are investors to experience minimal
losses. Thus, investors conclude they are in a safe and low
risk environment. From the perspective of 300 years of market
history, this easy money environment is actually a sign of
a market top.
So the main reason
making money in a down market is so difficult, is that one
must go against the crowd. This takes courage and in order
to overcome one's own emotions, must be fortified by ongoing
research. Eventually, we learn to rely on logic, rather than
emotion, to make decisions on how and where to invest. Do
not be fooled. As humans, we tend to underestimate our emotional
responses to stressful situations prior to entering them.
This is difficult to learn, though not impossible. Otherwise
there would be no great investors.
It does, however,
require more than knowledge. It also requires hiring the right
type of managers who have the skills and tools needed to profit
from a decline. The more you read and develop your own level
of understanding, the more confidence you will have in your