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Breaking down the investor's fallacy in 2021

The year of 2020 has been a shitshow with abundance of dramatic events to keep us entertained. Following this year, we continued to carry the momentum that drove since last November with no signs of a major pullback.


If you dabbled into the stock market recently, you probably realized a decent return on your investments - for some, enough to give fair well to their full-time jobs. In a bull market, it is a common phenomenon to get lost into the "investor's fallacy". In this case, the gambler's fallacy sounds more fitting - just watch this clip of a young Canadian couple telling their "secrets" to trading for success:

While I don't mean to criticize their kind intentions, I think there's a lot to take in from this new wave of social presence in "how to invest like a pro". Rather than pointing fingers and online shaming them, we should acknowledge the emergence of new players into the market.


Staying invested in the stock market is like playing a complex game of chess - if you want to beat the market, you will need to know every move that your opponent has. It's fine if you don't want to play the game either, you can just invest in the total markets and let the economy play the odds for you. It may not be the most attractive option at the moment, as

tech stocks have been the main headline last year. Comparing them side by side, a portfolio holding mainly disruptive tech stocks (ARKK) generated close to 150% of YOY return more than the S&P 500 index.



Nonetheless, it is generally more recommended to invest in the indices to gain a stable return over the long-term. This is because businesses come and go, along with many other economic factors that get baked into the stock market today. Unlike real estate investments that are primarily driven by demand and supply, the stock market is built on solid fundamentals that can be further explained by looking at the business and economic life cycle.


The business cycle looks at each company and how their businesses progress over time, which is broken down into 4 main stages: launch, growth, maturity and decline.

At the launch stage, most companies are privately owned by venture capitalists and angel investors, and cannot be accessed by the public until they go through a process called IPO. Most companies issue their IPO when they have built enough momentum to attract a wider audience of investors in their growth stage. With the enormous amount of funds gained from the IPO, it's up to the company and its stellar line of executive team to expand the business further. At a certain point, some companies get "shaken-out" of their competition, while the rest move on to the maturity stage. In desperation to maintain their competitive advantage, they may adopt vertical integration and expansion in hopes of prolonging their maturity stage. Eventually, the business spirals down to a decline stage and the company stocks start to plummet, while its new successor enters its growth stage.


When you are investing in the total markets, all of this is happening in the background - you are allowing the economy do its work. In a bull market, it may be tempting to think that you have found a way to beat the system, but this may not last awhile - yes, you may have to reconsider your early retirement plans.


The main message here is to stay sharp, and recognize the changes that are happening in the stock market. You may hear experts siding two very opposing views from "the volatility is coming - beware bullish investors" to "10 years of bullish stock market incoming". None of these speculations are worth the attention. If you want to play the game, it's important to remain neutral without being overly optimistic or pessimistic about the market, develop the mindset to welcome new players, and most of all - stay invested.

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