I was a teenager once. We all were and we have all probably uttered those words.
It's the tendency that people have to mimic or emulate the actions of other people in a large group. And nobody loves the herd mentality more than investors, and it's certainly not a new phenomenon.
In the late 16th century, the Dutch tulip market was booming. Tulips were a novelty for most of the world and were one of Holland's major exports. They were so popular that men were making and losing fortunes in one night. In fact, tulips were selling at as much as ten times the price of the work from skilled craftsmen. The price of tulips skyrocketed thanks to trading in tulip futures. When the bubble (widely considered to be the first such financial bubble) finally burst in 1637, fortunes were lost.
Watching the Alibaba IPO trade last week, I kept thinking about tulips. Yes, there have been three down closes in a row, but that really means nothing for the broad markets. There is always a 12.5% chance of tossing a coin and getting three heads in a row. Also, the percent change from the close four days ago is only 1.9%, compared to three-day drops of 3.4% and 2.4% back in January and April. Plus, the futures were back higher overnight.
Don't be a tulip trader. Make rational decisions and stand out from the herd.
We had another triple digit loss in the DJI yesterday, marking back to back days of losses. The selloff wasn't nearly as severe as the previous day, but none the less had some extension to the downside. Will this be a sign of things to come? Recent history says that it should correct itself sooner than later. I do suspect that we will rebound back at some point. It could be as early as today, although there is a chance we pop to drop in the markets. Buyers are still out hunting for value in the markets, so I do think a turnaround in due very soon. Buying the dip in these markets is becoming an essential way of trading lately.
We have noted over the past couple of months that the world is a pretty tense place right now. It also seems like there are a lot of entities are using fear tactics to further their own agenda. What should we really concern ourselves with and what is merely smoke and mirrors? We will never know what is real until after the fact so the best way is to keep things in context. One of my mentors gave me some great advice: "You can tell yourself this in the morning...All but once, the world is not going to end today". It is a bit facetious, but it's a valuable lesson. If you simply watch television (financial or mainstream), surf the Internet, etc. you may think otherwise. There is always a story that is going to change EVERYTHING!
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Keep a civil tongue.