Two years ago, stock prices hit their lowest point of the current market cycle. As the investor herd wonders how to make money in year three of the Bull market, I thought it prudent to observe the herd from a distance and frame the market cycle in a different way.
I like to divide the investor herd (and market cycle) into three segments--Speculators, Skeptics and Suckers:
- Speculators jump into stocks in the late stages of a Bear market and into the early stages of the Bull market; they are the gamblers; and they are willing to accept higher relative risk to capture the largest price movements that occur later, when the Skeptics and Suckers are buying in larger numbers.
- Skeptics wait for the Speculators to make the first move and to see real evidence of economic recovery before buying into a Bull market. Skeptics don't jump in; they move in increments; and they usually miss the biggest price movements, both up and down. Put simply, Skeptics make their money when neither fear nor greed are at peak levels. There is also a sub-category of Skeptic, which are the Contrarians, who are skeptical to the degree that the most prudent position is the opposite of the herd.
- Suckers will buy or sell at any point during a market cycle but tend to buy more at higher price levels and sell more at lower price levels; therefore, as a whole, Suckers are the last to join a Bull market and the last to abandon it.
These are generalizations and most investors will exhibit characteristics of all three types at various points of a market cycle. For example, at the market cycle extremes--the highest and lowest points--many Speculators and Skeptics become Suckers. Also, there are hybrid forms (e.g. Speculative Suckers, Skeptical Speculators, Perma-Suckers, and so on).
At the present moment, I believe the market cycle is somewhere near the mid-point, where most Speculators have made their biggest gains; at least half of the Skeptics' assets are in stocks; and the buy high/sell low Suckers have yet to jump in. In other words, uncertainty about the near-term direction of stock prices is higher now than at the easy-to-recognize extremes: The Bull market has room to run higher but short-term corrections are inevitable; and any investor armed with five-minutes' worth of gathered information could make a believable case on either side of the Bull vs Bear market argument .
"Ever more people today have the means to live, but no meaning to live for." ~ Viktor Frankl
If there were to be a fourth 'S' for investor types, it would be the Sages: These are the investors who do not predict, categorize, or apply heuristic models; they place self-knowledge and self-awareness above financial knowledge and market awareness; and they use money as a tool for life rather than following the herd's general behavior of using life as a tool for money.
Where do you think the market cycle is today? When do you think the current Bull market will end? Are you a Speculator, Skeptic or Sucker (or Sage)?