What if this is the chance of a lifetime?

1 February, 12:05 PM
The first month of the year in the financial markets was very interesting (Photo:Ibrahim Boran \ Unsplash)

The first month of the year in the financial markets was very interesting (Photo:Ibrahim Boran \ Unsplash)

The first month of the year in the financial markets was very interesting.

It was interesting not in terms of statistical records, since there were none, but in terms of how important a factor psychology is in shaping financial trends. And no matter how many clever books are written about the fact that fundamental factors cannot be neglected, no matter how much Warren Buffett’s ideology of long-term investing is cited, and no matter how much statistical evidence is published, as soon as there is an opportunity or even the illusion of quick earnings, fundamental factors recede into the background, giving way to emotions and desires that lead people to neglect possible risks and put everything at stake in pursuit of profit.

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What happened?

The headwinds of inflation, which not only prevented investors from moving forward all last year, but also ripped a lot of financial sails to pieces, began to gradually lose strength. The active struggle of the Fed against rising prices very quickly made money quite expensive, and this, like a litmus test, demonstrated the flaws and problems of many "new economy" companies whose stock prices have skyrocketed in recent years, but which were in no way grounded in fundamental qualities like financial and operational performance. The huge amount of free money printed during the pandemic created a bubble in various asset classes, including the securities market, which began to run out of air last year. This is where an important question arises.

Has the bubble completely deflated, or is it still flying? "Smart money" – experienced professional analysts and investors – believe that bad times are yet to come and it's too early to celebrate. If history teaches us anything, only the first phase of the fall has so far ended, and the second phase, which is always more unpredictable and dramatic, is just beginning. So it was in 1929, 1974, 2000, and 2008, and it will probably be so now in 2023. In turn, retail investors are tending to think differently and are betting that after inflation began to decline since July last year, the Fed will change its anger to mercy, revive the era of free money, and thus the markets will continue to bloom as before .

January, in my opinion, was a vivid reflection of such dreams. Every month of U.S. economic data published that could be interpreted in favor of putting an end to the Fed's tough policy was accompanied by a market boom. Most interestingly, the most powerful growth came not from those companies that are the basis of the American and global economies which showed really excellent results, but from companies whose price mainly depends on the bright promises of a happy future and the blind faith of those who want to make a quick buck.

This growth was fantastic

This growth was fantastic: some companies that were confidently flying into the abyss of bankruptcy back in December - like crypto exchanges, delivery companies, virtual casinos, etc. - increased their stock prices by 50% or even 100% in January. At the same time, in terms of their fundamental indicators, their condition has not changed, as they have remained the unprofitable inefficient companies which they were before. Here is the psychology for you: the mass hype is doing its job! If everyone believes that MMM [an infamous Ponzi scheme which operated in Russia and Ukraine in the 1990s – ed] gives them a chance to earn money, then it is very difficult to stay away from such an opportunity. What if it’s the chance of a lifetime? You can’t miss this, especially since modern technologies allow anyone to experience happiness on the stock exchange without even getting up from their own sofa, and to do so for any amount, whether for hundred dollars or for a hundred million. This is how the investment market is gradually turning into a casino, available to millions of players, regardless of their education, experience, or wealth.

But is it possible to make money in this casino? As in any game of chance, everyone has a chance to win. But there is one fundamental difference between the casino and the securities market: the mathematical rules that underlie the activity of gambling establishments state that the longer you play, the higher the probability of losing. In the case of securities, the opposite is true: it is long-term investments that provide an opportunity to earn.

As the most successful investors in human history have argued, and as evidenced by a variety of statistics, the only way to make big money is by gambling, accumulating income, and making the money you earn make more money. Great is the power of "compound interest!" Not without reason, good professional consultants advise their clients to invest over a period of at least five years, and preferably ten or more. Over the past hundred years, investing in the S&P 500 for a period of two decades or more has always paid off, no matter what crises are experienced during this time. If you were ready to invest over five years, then the probability of making a profit was 89%, as opposed to 62% for a month and only 53% if you planned to earn “today for tomorrow.”

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I think that many of those who earned on the frenzied growth of companies in January who are part of the "plans and promises" industry smile dismissively when reading these lines, and laugh at those who invest the old-fashioned way "for the long run," based on certain fundamental rules and laws. Society’s imagination, exacerbated by social networks and advertisements from intermediaries, creates its own images of rich people - crypto specialists, founders of startups, home-grown traders in complex financial instruments, investors in new buildings - these are the ones who smile at you from smartphone screens, talking about the millions they’ve earned and their insane percentages of growth. This is how Lenya Golubkov smiled when he invested in MMM, and before him was the ordinary dot-com fan, the shareholder of the South Seas Company, and the seller of tulips. Some people, of course, ultimately do earn, just as people with happy smiles and full pockets also sometimes come out of casino doors. But how many of you know people who managed to keep their quick earnings or make them systemic? Not many, I don't think. And the statistics are not in their favor.

Therefore, do not be deceived by the fascinating stories of other people’s wealth – that which burns brightly does not always provide long-term warmth. I know that in Ukraine we are used to living for today, and rarely can anyone afford to plan for many years. Especially now! But if you still decide to invest outside of Ukraine and decide that keeping money in securities is better than under a mattress, don't try to make money instantly and don't think that a month like this January will last forever. It is better to think about long-term investments and the enormous power of compound interest that always rewards those who are patient.

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