Bidding The Lows
Warren Buffett made such a contrarian take with the psychology of markets when he said be greedy when others are fearful and vice versa.
I think it's harder to be greedy when others are fearful than being fearful when others are greedy.
Greed as an emotion seems less sticky to me than fear but when it comes to taking action, trying to go against the tide of getting overwhelmed by the fear of the collective isn't easy.
Put slightly differently, it's much easier to get caught up in collective euphoria than to fight collective panic, partly because fear triggers our survival instincts more powerfully than greed triggers our acquisition instincts.
Historically or rather generally, markets almost always recover from their lows, it's like a social contract that we've all agreed to uphold, so to speak.
When you start becoming selective however, a floodgates of what ifs with regards to the specific investment pays you a visit and you'll have to process many of them one by one in order to satisfy this aspect of our brain that thinks we have to analyze it all before taking a step.
Narrative vs. Numbers
I'm all for critical thinking to find gaps in reasoning and make better sense of opportunities.
Experience on the other hand has taught me that markets operate on a different set of logic that defies rational analysis.
Somehow, bridging the gap between the analytical logic and market logic is where most of the profit lies via the sweet spot where you can act decisively while others are paralyzed by analysis.
Say you're watching a perceived fundamentally driven token drop 40% because of temporary setback or market overreaction. Keeping with your thesis for this project tells you it's undervalued, and that you could buy more here but every headline screams danger and narratives are churned out on how the token will soon become worthless.
Even when narratives aren't fundamentally correct, it's not always a good idea to fade them as they have a way of influencing price movements in the short to medium term.
Such is the reality of markets, in that perception often matters more than fundamentals, at least temporarily.
Also, such market situations brings up the age-old question of do you want to be right or do you want to make money?
Crowd Immunity
Of course, even when I do not side with the majority, I'm tempted to get to the bottom of their "reasoning" because doubt creeps in naturally.
What if I'm missing something everyone else sees? Could it be that my analysis has blind spots I haven't considered?
This is what bidding the lows is mostly about, trusting your research while acknowledging you might be wrong, but believing the risk-reward makes sense even with that possibility.
The tension between wanting to analyze everything thoroughly versus accepting that markets often operate on sentiment and momentum rather than pure logic is one of the central challenges in investing.
Here are a few simple ways I've learned to approach this challenge:
Numero uno, set clear rules before emotions take over. Decide in advance how much you're willing to risk when you see an opportunity during a panic. This removes much of the emotional decision-making when fear is at its peak.
Numero dos, focus on what you can control. How hard is it to accept that we can't control market sentiment or timing? But controlling your position size and exit strategy is within reach. Small bets during uncertain times can still pay off big without risking everything.
Numero tres, remember that being early often feels the same as being wrong. The market might take months or even years to recognize value, so patience becomes just as important as courage.
Lastly, make peace with the fact that you'll never have perfect information, this part of our brain that what's everything to make sense before taking a step should be at the back burner in this regard.
In my view, the hardest part about bidding the lows while it's chaotic is the loneliness aspect of going against the crowd and the discomfort of not knowing if you're right until much later.
Thanks for reading!! Share your thoughts below on the comments.