The Inevitable Drift Down from “Can’t Lose” Owning Stocks to “Can’t Win”, by Charles Hugh Smith

Markets are exercises in crowd psychology, which can turn on a dime. From Charles Hugh Smith at oftwominds.com:

Even if an AI program advises selling everything and walking away from the market for five years, how many of us would take this advice?

Only those who experienced the heady euphoria of the late 1990s dot-com bubble in tech stocks know what the shift from “can’t lose” confidence to “can’t win” surrender feels like. The chart below illustrates this emotional cycle of confidence rising and fading as bubbles inflate and deflate.

Though we like to tell ourselves we’re rational investors, animal spirits are the driving force in euphoric bubbles where our beliefs direct our decisions: we come to believe that we’re smarter than the cautious dummies, that the technological revolution underway has plenty more room to run, that policies supportive of stocks have been refined and institutionalized to the point they’re rock-solid foundations, and so on.

Though the chart doesn’t go back to the 1870s bust or the 1930s Great Depression, the cycle played out in those eras, too. The process of confidence fading is painfully long, as the rewards of “buying the dip” have been so generous and reliable that we naturally assume any decline will be brief.

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