Chapter 25 [2022 Inflation, interest-rate hikes, and the Ukraine incident]

Source:https://www.facebook.com/100063294665283/posts/562417345878083/

[James: Origins and Today] Chapter 25 - 2022 Inflation, interest-rate hikes, and the Ukraine incident (04/13/2023)

On February 22, 2022, the Soviet Union recognized the two republics in Ukraine and sent troops to station. Europe initiated sanctions. The United Kingdom sanctioned Soviet businessmen and five banks. The United States and the world imposed sanctions on the Soviet Union. Taiwan Semiconductor also joined the United States in embargoing the Soviet Union. The market fell by 2% that day, and then fell by another 2.56% the next day. The market QQQ corrected from the highest point of $408 to the lowest of $329 on November 22, 2021, reaching 19.3%, which is close to the 20% decline of the short market. The market sentiment has begun to panic, and I believe many investment friends are also very panicked. This is why I know that I should write a message to everyone to calm everyone's panic. Here's what I said:

"I have been in the market for more than 30 years and have seen countless market declines. Usually, the process of investor sentiment changes when the market falls has the following steps:

ㄧ. The market is very excited: several index stocks have reached new highs. Everyone is relatively optimistic about the market and does not think the market will fall. In the investment group, everyone talks freely and has their own views on individual stocks and the future. Everyone is a stock god. Everyone can talk about various reasons for the rise of the market and individual stocks and their unique personal insights. They completely ignore the existence of the market and think that they can control the market and that they are the stock god who knows the market best. At this time, the predicted high point of the stock price is still higher, and some people firmly believe that the market will not fall. If it falls, they will buy more, or they are even less likely to think that their blue chip stocks will fall by 90%. This has created an objective environment for the market to fall from its high point.

2. Overconfidence of investors in the ups and downs phase of the market: When the market begins to fall by 10%, many people begin to think that the market will soon fall and rebound. The market falls to a key support level and begins to rebound. All investors become optimistic, and some begin to increase their investment. Investors who sold at high points also buy at this time, and more borrowed investors buy here. There must be investors who completely ignore our reminder that the funds pledged for borrowing cannot be used in the investment market, nor can more than 20% of the loan be used. If the pledged loan is used for more than 20%, your mood and mentality may not be able to bear it when the market falls. The same goes for investing three times in TQQQ. Investors with poor psychological quality who take too much risk (may be feeling the pressure now).

Remember that stock pledge borrowing must not be reinvested in the market, and you must not use pledged borrowing or financing to reinvest when the market falls. Some people are overconfident in individual stocks and over-finance. Sometimes they think that financing 30% is not high risk, but everyone must remember that when the stock market falls, individual stocks will fall to the point where you doubt your life. It is common for individual stocks to fall by 90%, such as Amazon. The price dropped from $96 to $6 in 2000. This is no joke. Excessive leverage and financing are investor behaviors that will lead to bankruptcy in the market. If you have not carefully followed our past reminders, you may have to reduce your position during the decline, especially the financing position (we completely prohibit students from financing) to avoid the risk of eventual bankruptcy.

In the second stage of the market decline, investors did not think the market would fall further. Many investors swore that they would not sell my stocks even if they dropped 90%. We suggested that everyone sell their stocks and transfer them to the index fund QQQ. There were almost zero takers. In fact, this made me even more worried about the market. Everyone is so confident. Based on my past experience, the market will continue to fall in this state. Based on my experience of more than 30 years, the market has only dropped 20%. It will not stop there, but I don’t know how deep it will fall. Anyway, those who speculate on the market will definitely not end well. Those who are overconfident in the market will be severely punished by the market. A few weeks ago, I suggested that everyone sell individual stocks and transfer to the index fund QQQ, but if I do this, I may be the only one who implements it.

3. The main downtrend of the market: Today, February 23, 2022, the market fell below the support level and fell rapidly and sharply. This means that the market has begun to panic, and those who were previously overconfident have begun to waver. On February 22, 2022, the Soviet Union recognized the two Ukrainian regimes and claimed that peacekeeping troops were stationed in the Ukrainian region. The market fell sharply and closed with a cross K line at the end of the day. Many investors believed that the market might stop falling and rebound. The market fell even more the next day. By this time, the market should have started to panic. As for how long the panic will last and how much the market will fall, no one knows. At this time, the mentality of many investors who hold so-called high-quality stocks or risky assets has begun to waver. We will see when these people will break out next. Only these overconfident people will fall rapidly again in the main decline period. Some people will hold on until the end of the decline, lose confidence and panic and sell their own stocks irrationally, or be forced out of the market due to financing calls. Only then will the market have a chance to stop the decline. But for investors who invest in indexes for a long time, there is no need to panic at all, because you are investing in an index fund that will always rise in the end. Unlike stocks, some people must begin to doubt whether the risky assets they hold will eventually return to zero. I don't describe this to scare you, I just want you to remember not to be overconfident in yourself.

Overconfident investors are actually the most ignorant investors in the market.

4. Panic selling at the end of the market decline: The market will definitely end after panic selling, so long-term investors must remember not to sell your index funds here. Investors who still have funds should be brave enough to take over here. If you hold too many individual stock positions, especially if your single stock position is too high, and if you have begun to lose confidence in individual stocks, you can reduce your individual stock positions and transfer to index funds at this time (although it is too late). This is also a necessary strategy, but it is unavoidable. When you sell and transfer to index funds, the market begins to reverse upward, and you may sell away your individual stocks. However, if the market really continues to fall and your individual stocks fall by 90%, you will regret it. But this result is definitely caused by your overconfidence at the beginning. All investment mistakes are definitely not made by the market or others. The only responsibility for all investment mistakes lies with the investors themselves.

At this time, investors who hold individual stocks will be thinking or thinking about various horrific events in individual stocks, which will eventually scare you. After this market correction, everyone must review the changes in their mentality during this process. Market shocks are the only best opportunity to train investors to improve their investment quality, and slowly adjust themselves into high-quality long-term investors. Now that the market has dropped 20% from its high point, everyone here is very panicked. I want to tell long-term investors that they must not panic, let alone sell the index funds in their hands.

5. The darkness before dawn will definitely see the light: Everyone must be very panicked when the market falls rapidly or sharply. When you and the market are in extreme panic, the bottom of the market should be here. At this time, everyone must return to the essence of investment and think, "Investment is about long-term rises and short-term fluctuations." It is normal for the market to fall sharply in the short term, and it is inevitable to rise forever in the long term. During this plunge, only investors investing in index funds can enjoy the natural market fluctuations. Because there is no "phase" in investing in index funds, there will be no ghosts and monsters, and you won't worry about whether individual stocks fall to zero. The market will eventually bottom out, rebound and rise, and finally hit a new high. Short-term fluctuations in the market are natural, but long-term rises are inevitable.

Remember there must be darkness before dawn, and there must be light after darkness.