Framing Market Cycles: Speculators, Skeptics & Suckers

"The crowd is untruth." ~ Soren Kierkegaard

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)?

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Related:

Thoughts on Taoism, Rip Currents & Market Cycles

Investor Sentiment: Stepping Back to Hope

 

Comments

[Greg Linster]

I'm not sophomoric enough to make a prediction and I'm skeptical of those who do. Whether or not that makes me a sage is a matter ontological.

I've been meaning to ask you a question Kent: Have you read The Black Swan or Fooled by Randomness?

[Kent @ The Financial Philosopher]

A sage would not call himself a sage. Based upon that logic, perhaps you are a sage!

I've not read The Black Swan or Fooled by Randomness. From what I've heard, I imagine I would like them.

I think the only 21st century book I've read for pleasure is Eckhart Tolle's A New Earth.

Next time I get to the library I'll look at the books and consider checking them out.

Thanks...

[Vobfactory]

Hi, New Earth is a life changing book (at least for me) and your posts are excellent. I became interested in trading in part due to the similarities in characteristics of a "good" trader and an "enlightened" being. I thought how great would it be to pursue profession which would be in alignment with the inner purpose (as Tolle calls it). When I read your posts, I wander how your philosophy helps you in the markets. Besides providing a proper perspective, is it translatable into practice of speculation?
Thank you very much
Vadim

[Kent @ The Financial Philosopher]

Vobfactory

I believe that self-awareness is the key to success in anything and everything in life. Part of this self-awareness is "inner purpose," as Tolle describes but it is also an awareness of one's own emotions as they occur, which is a strength for investment traders.

My life philosophies that align with my investment philosophies are closest to Taoism, which is largely a passive philosophy. Therefore I use index mutual funds and ETFs for allocating client assets.

I don't try to "beat the market" but rather seek a strong absolute return by virtue of prudent asset allocation.

In other words, I'm an "allocator" not necessarily a "trader" or stock picker.

"Nature does not hurry, yet all is accomplished." ~ Lau Tzu