Two neat little observations I made on a bike ride today. Actually, I should probably preface this one by saying there are three kinds of markets: bull markets, bear markets, and choppy markets that you can't really understand.
You really should only be trading one of those. Now, which one that is, is up to you, but hopefully, you realize not to trade the choppy markets that you don't understand, because if you don't understand it, you can't really win on it. I would recommend bull markets because if you find some little company that gets pumped to infinity, then you can make nearly infinite returns. In bear markets, it's a little harder because there's really no good way to play. I mean, yes, you can—if you understand the intraday market movements and understand microstructure very well, then you can do great no matter what the market is. So, it's not good to say that you can do something if you get lucky. Well, of course, if you get lucky, you can do it regardless.
Anyway, that was the thought: there are different kinds of markets, and I'm going to focus on bull markets.
The stages of a bull market
In bull markets, there are three stages.
- Stage one: Everything's ramping up.
- Continuation stage: Anything that was already starting to go up continues. The ones that needed to go the most—now those are the days when they skyrocket. Meanwhile, everything else has gone up a little bit as well, so you should be careful. If you're waiting to get out of something that isn't a winner to get into a winner, you're going to be waiting until that day when, once you get out of the non-winner, it's going to be too late to get into the winner.
Possibly. Of course, as I said earlier, if you have luck or some sort of assistance, then you might do well regardless. You might do better than someone who doesn't have this, regardless.
Timing and price discovery
So, the second thing is: once you're in the right environment, you want to be choosing the right time. You want to be holding during the days when it goes up. One good thing to keep in mind is that while it goes up, nothing is actually happening. The times that things are happening are at the beginning, which we talked about, where it's trying to move. During the go-up period, that's just when there's very little going on. Someone else is trying to get in, whereas other people aren't trying to get out—demand is greater than supply. And conversely, during bear markets—or bull markets when it goes down—it's because supply is greater than demand.
I saw a great example of this when biking today. I put in a ton of effort for maybe 30 seconds, made it through a green light, and then I just cruised along on the effort that I had already generated. That cruising along is an exact copy; that's like holding as price discovery happens and the price just changes. You then benefit from the fact that you were in the right direction during that price discovery.
Tools vs. foundational skill
Oh, the second thing was about how, even after I was cruising, cars were driving by. They didn't even put in the effort; they just pushed on the pedal, and they were passing me during my cruising time. Which brings up another point: if you have better tools, you're going to do better.
Now, will you be better at moving? Maybe not. If someone else is on a motorcycle and I'm on a bicycle, and then we're both given bicycles one day, I'll be better at biking than that person who was always just using a motorcycle. And we'll both be better than someone who was only using a car. But while you have the car, you'll still be going better and faster.
So, you want to increase your tools. You want to increase your effort and knowledge. Once you have the knowledge, it's easier to increase your tools and to increase the effort properly. Once you increase tools, it's easier to skate faster, and then eventually, you skate on what you know.
Revisiting the bull market stages
And another thing from earlier is that there are three stages in a bull market. They are:
- The time when it's preparing.
- The time when it's moving up.
- The time when it consolidates its gains.
Sometimes that consolidation doesn't work—I mean, sorry, sometimes that consolidation means that the gains all disappear.
When you're at the top of a hill, you're going to go down. When you're on a plain, you're going to go forward. Then you're going to get to a point where you're at the bottom of a hill. Now, you can keep pushing and trying to go up, or you can just wait. You might be able to get around that hill. And in many parts of life, you can get around that hill.
This is not financial advice. I'm not a financial advisor. Consult a qualified professional before making investment decisions.