Paradoxical polarity 1:
Markets crashes are unique and unexpected, while at the same time follow a recognizable pattern with usual periodicity.
It is tempting to focus on the side of uniqueness becoming overly concerned with how different this time is. “This time is different” is a dangerous phrase both in the good times and the bad. Although every crash has many unique aspects, focusing on them causes investors to become over-optimistic and over-pessimistic in their portfolios.
It is also temping to focus on denying that such crashes are truly unexpected, leading many to regret not having acted on that feeling “to sell at the top”. In reality, no-one knew this crash was going to happen like this and even though we all “had that feeling” in February, acting on it would have caused us to sell many times before, significantly lowering average returns.
Paradoxical polarity 2:
Another polarity during crash-times is the simultaneous urge to “do something” and to “do nothing”.
The “do something” urge polarizes investors further by making both buying and selling appear tempting. In the morning, we might be tempted to go to cash, but by the afternoon, we are seeing buying opportunities.
The “do nothing” urge is also split between appearing both wise and naïve at the same time. No wonder investing can appear so challenging and emotionally draining.
Instead of shifting through these conflicting choices (i/e guesses), prudent investors continue to follow what ever investment approach they have chosen before the crash started (see our prior post on this topic here). This eliminates most (not all) of the agonizing and instead recognizes the great investment opportunities.
Paradoxical polarity 3:
Finally, there is a polarity between everything appearing crystal-clear in the rear-view mirror and extremely foggy ahead. The risk is confusing the two views.
Yes, looking backwards, insightful commentary instantly emerges explaining what has just happened. However, we cannot rely on such commentary to invest. While explanations make us feel good they also create a very harmful aspect of investing: consensus.
In January the consensus was “things are very optimistic”, in February is was “it will be a quick V-shape”, in March “recession is coming”. Consensus is already priced-in and what actually moves markets going forward is the surprise and the unexpected. The more different the future is from the established consensus, the stronger the market moves.
Instead of over-relying on other people’s short-term explanations and “now-casted forecasts” (which are just extrapolations of the recent market moves), let’s go back to the reason why we invest in the first place and think of the longer-term horizon. This slowdown, no matter how severe it appears at the moment, will fade out.