Good Times, Bad Lessons: Why Booms Can Be a Curse for Investors 2021-04-25

Remember those heady days when the stock market seemed to defy gravity? Every stock was a winner, and everyone felt like a genius. I even remember one investor, a woman brimming with confidence, dismissing Warren Buffett as outdated. She'd made a killing in a ridiculously short time, convinced of her own brilliance.

It's a classic case of confusing a rising tide with personal skill. As the saying goes, "When the water rises, all boats float." It wasn't the duck's paddling that raised the water level; it was the inflow of water. And just as surely as the tide comes in, it will go out. The duck, mistaking good fortune for skill, is in for a rude awakening.

The stock market is rife with these illusions. Many investors, especially during bull runs, attribute their winning picks to their own astute analysis. I recently saw someone on Xue Qiu boasting about their US stock picks, concluding that making money was a piece of cake. But let's be real: a significant factor driving that market surge was the massive injection of cash by the US government and money inflow over the world.

This dangerous delusion extends beyond the stock market. I've seen it time and again with lottery winners and gamblers. They hit it big once, and suddenly, they're convinced they have a system, a special insight, a capability that guarantees future wins. They conflate a lucky break with skill, becoming overconfident and doubling down on their bets. The inevitable result? They end up losing far more than they ever won. It's the same principle at play: confusing luck with genuine ability.

This is the dangerous lesson of a booming market (or a lucky streak): it teaches bad habits. It breeds overconfidence, blinds investors to risk, and fosters a belief in their own infallibility. When the music stops, and it inevitably will, these "market geniuses" (or "gambling gurus") will discover that their "skill" was nothing more than being in the right place at the right time. 好市场 教坏经验 (Hǎo shìchǎng jiāo huài jīngyàn) – A good market teaches bad lessons. It's a lesson we all need to remember.


Summary:

Bull markets (and sudden windfalls) can be deceptive. They inflate investor confidence and create an illusion of skill. Attributing success solely to personal ability during such times can be a dangerous trap. Whether it's the stock market, the lottery, or a casino, confusing luck with skill is a recipe for disaster. If investors fail to learn from their experiences and acknowledge their limitations, they become vulnerable to significant losses when market conditions (or Lady Luck) inevitably turn unfavorable.

Understanding one's 'circle of competence' – the areas where they possess genuine knowledge and expertise – is crucial for navigating market volatility. By recognizing their limitations and investing (or gambling) within their areas of understanding, investors can make more informed decisions and increase their chances of long-term success (or at least minimize their losses).

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