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If you happen to glance over the business section of the news, you’d probably read some articles about how the stock market has been “bearish” lately, there is a bubble in a certain industry, or there’s an upcoming recession predicted by some expert. If you’re interested in learning about investing and the stock market, all that fancy jargon could turn you off as it makes things more complicated than it should be.
Since those kinda words are usually on headlines of business and investing articles, learning what a few of them means should tell you a lot about what’s happening to the market at a glance. Let’s talk a bit about about that here.
Reading about the Market for Beginners
The economy moves in cycles
There’s a famous Filipino song called “Luha” (Tears) by Aegis, and one of the last lines when translated to English say something like “the wheel of life keeps turning, I used to be at the bottom, why am I still there? The wheel of life keeps turning, I used to be at the bottom, I hope I come out on top tomorrow.”
Just like the wheel of life, the economy and the stock market also moves in cycles.
In some years, companies, the stock market, and the economy in general does very well. Business is booming, companies expand and sell a lot more products, they hire more people to increase production, and all those new workers spend their new paychecks to buy more stuff thus further increasing profits for businesses and further improving that cycle.
Unfortunately, good times never last. Disasters like storms and earthquakes, pandemics (like covid-19), stock market and housing bubbles, government corruption, or something else will cause the economy to weaken. The problem hurts or even shuts down businesses, people lose jobs and people have less money to spend. Since there are fewer customers, businesses earn less so they need to lay off some workers (or risk going bankrupt and have everyone lose their jobs).
Fortunately, the bad times don’t last either. People overcome disasters with their resilience and ingenuity and businesses and the economy recovers. As businesses start doing better, they are able to hire more people, and the lower unemployment means more people have paychecks and money to spend, and so the cycle starts anew.
That’s what Peter Lynch calls the boom and bust cycle. When things go well, the economy is booming. When things aren’t going well, the economy is going bust.
Although experts say we must not try to predict what’s gonna happen next in the near future, knowing where we are or where we might be heading in that cycle will definitely help us make better decisions when it comes to investing, and we can also learn about businesses that remain stable during the bad times so we can move our money there.
The steps in the cycle:
- Downturn/Market Downturn – A downturn is when the market, business, or economy declines. A downturn may just be temporary though, but if there’s a huge problem in the economy, the government, or the country in general, the downturn can continue for a long time and turn into a…
- Recession – When the economy continues to decline and more people start losing their jobs month after month, it’s called a recession. You’ll know we’re in a recession because times will be difficult and it will be all over the news. Understandably, there’s a recession because of the covid-19 pandemic.
- Upturn – The opposite of the downturn, the upturn is when the market, business or economy goes up. Again, this could just be temporary, but it could also last longer which is good news for everybody.
- Recovery – Recessions don’t last forever and eventually businesses and the economy recovers. Businesses start doing well again, unemployment goes down as more and more people are hired, and the economy (and stock market) goes up.
Depression – While recessions are rather common, if a recession keeps going and lasts a year or more it may then be classified as a depression. While it’s extremely rare, almost everyone will suffer if an economic depression happens and we better pray we don’t experience another one like the Great Depression of 1929.
Tip: You can “recession proof” your portfolio (your investments) – While a lot of businesses like car manufacturing and construction do badly during recessions, certain industries and businesses that produce things that people can’t live without can still do well. Those are the businesses such as fast food, electricity, water, etc.
Bubbles and Corrections
Bubble – This usually happens when certain investments get so popular that even the masses of inexperienced investors try to buy a piece of it. That increases the prices so much that it very often goes far higher than what it’s actually worth as an investment. Greed fuels bubbles for a while but people WILL eventually realize that the hottest new stock or investment… isn’t really that hot.
Correction – Peter Lynch defines a correction as a fall of at least 10% from the recent peak (“peak” = highest price). As you know, bubbles eventually burst and the previously extremely high prices will fall to lower but more reasonable levels. Expect a lot of investors who bought at the peak to lose a lot of money when the bubble bursts.
Some examples of bubbles:
Bears and Bulls in the Stock Market
In the long-term, a stock’s price moves depending on how well the company does over time. If a company is doing well, the stock usually goes up, but if the company is doing badly, the stock usually goes down. In the short-term, however, the price will normally go up and down almost randomly during a typical trading day.
While most company’s stocks go up and down on their own and independently of each other, when the economy is doing extremely well and most businesses are booming, a lot of stocks go up. That’s called a bull market. On the other hand, when the economy is suffering (like during recessions), the prices of most stocks will go down and that’s called a bear market.
Remember that when reading the financial news.
- Bull market / “Bullish” means the market is going up.
- Bear market / “Bearish” means the market is going down.
One final tip: Tune out the noise and don’t try to time the market.
It’s said that if there’s a system that can perfectly predict where the markets will go, whoever has it will keep it a secret and they’ll go on to become the richest person in history. Unfortunately, there is no way to predict where the market will go and not even the top professionals who read and analyze the market fail.
You can make educated guesses based on your own research, but take what the investment media says with a grain of salt. That’s one of the major tips from people like John Bogle, Peter Lynch, and several others: Don’t try to time the market.
The investment media keeps writing about hot stocks or stocks to avoid, investments to buy now, or investments you should get rid of, and if you keep following the trends reported by the media you may lose money in bubbles as well as miss great opportunities.
Massively hyped “buy now” stocks and investments can become bubbles during bull markets, and during bear markets when the investment media tells stories of doom and gloom, you’ll miss the opportunity to buy great company stocks and other investments at bargain prices.
What’s the solution? Invest regularly
According to Peter Lynch, you should simply “set up a schedule of buying stocks or mutual funds so you’re putting in a small amount of money every month, or four months, or six months.” That’s a technique known as dollar cost averaging (or “money cost averaging”).
By doing that, you avoid paying for too many shares when stock prices are too high such as during bubbles, and you get to buy more shares of GOOD companies when stock prices are low like during recessions.
The investment world is quite complicated and there’s a lot more that we all need to learn, but for now we’ll end this lesson here.
If you have any questions or observations, just ask us in the comments section below!
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