[15 Years of Investing] The Magic of the Market Drives People Mad—The Trap of an Era Where Everything You Bought Went Up

When I first started investing, I thought there was such a thing as the “correct way to invest.”

Buy when it’s cheap.
Ride the stocks that are rising.
Even if it drops, wait until it goes back up.
Stock analysis, corporate value, technical analysis, etc…

In reality, there are times when that works.

What is actually scary is succeeding with that method over and over again.

The more you succeed,

“This method is correct”

“I have a talent for investing”

you start to think.

However, in the market, the method that was correct until yesterday can suddenly become the exact opposite action overnight.

I realized this strongly during the initial bull market of Abenomics and the subsequent collapse of the biotech stock market.

The early days of Abenomics were a market where “if you bought it, it went up”

In the Abenomics market that began around November 2012, Japanese stocks as a whole rose significantly.

Banks, real estate, securities, emerging stocks.

Even stocks that had been stagnant until then rose one after another.

Among them, the most intense were biotech-related stocks.

In addition to the attention on iPS cells due to Professor Shinya Yamanaka winning the Nobel Prize in Physiology or Medicine in 2012, policy expectations for regenerative medicine also overlapped, and a large amount of capital flowed into biotech-related stocks.

To describe the feeling at the time,

if it had “bio” in the name, any stock would go up.

That was the kind of market it was.

Whether the performance was good or not.

Can you really make a profit?

Isn’t the stock price overvalued?

More than things like that,

“It’s biotech-related”

was enough to get it bought.

There was such an abnormal strength.

And if it dropped a little, it would be bought again.

In a market like this,

“Buying stocks that have gone up”

“Picking up stocks when they dip”

“Riding a strong theme”

—these actions actually become the right answer.

Because, in reality, you make money doing that.

Thinking you have talent when the overall market is just rising

And in a market like this, another phenomenon occurs.

People start to mistakenly believe they have investment talent, even though stock prices are only rising because the overall market is up.

The stocks you buy go up.

The next stocks you buy also go up.

If you buy when they dip, they go up again.

If you repeat this a few times,

“I’m starting to understand stocks.”

It is understandable to think that.

I think it was a market where it was easy to fall into that feeling at the time, myself included.

However, what you really need to consider is,

Did it go up because you were good at picking stocks?

Did it go up because your analysis was correct?

Or,

was it simply that the entire market was rising?

That is the question.

When you are in a bull market, it becomes very difficult to make this distinction.

At the time, the stock market itself was booming, and a large number of self-proclaimed “individual investors” appeared.

At least within the scope of what I saw, the number of people talking about stocks increased all at once.

However, when the market collapsed, many of those people were no longer to be seen.

The market creates investors, and when the market changes, they disappear.

Seeing this scene,

“Making a profit” and “being good at investing” are not the same thing

I became strongly aware of this.

And then, the biotech stock market collapsed.

On May 23, 2013, the Nikkei Stock Average fell 1,143 yen in just one day, from 15,627 yen the previous day.

The closing price was 14,484 yen.

The decline rate is 7.32%.

Hearing “a drop of 1,143 yen” has no impact at all by today’s standards.

However, the Nikkei Stock Average at the time was still in the 15,000 yen range.

If we were to translate that to the current level of the Nikkei Stock Average,

it would be like a drop of about 4,000 to 5,000 yen in a single day.

A sudden, major crack appeared in a market where continuous gains had become the norm.

Of course, this day did not mark the complete end of the overall bull market for Japanese stocks.

The Nikkei Stock Average continued to rise after that.

However, the nature of individual stocks changed.

Particularly in biotech-related stocks, the previous one-way upward trend collapsed after late May, and stocks characterized by sharp drops and wild fluctuations became prominent.

The important point here is not

that the stock price fell.

It is that the investment method that had been working until then stopped working.

“Buy the dip” was no longer the correct answer.

In a bull market,

if a stock that went from 1,000 yen to 1,500 yen drops to 1,300 yen,

“it has become cheap”

is how one can think about it.

If you buy there and it heads back toward 2,000 yen, then buying the dip is a success.

When you experience this many times,

“The more a stock drops, the more you should buy.”

That is the feeling you get.

However, if the market itself has ended, the story is the exact opposite.

It went from 1,500 yen to 1,300 yen.

You think it’s cheaper, so you buy.

It drops to 1,000 yen.

You think it’s even cheaper, so you buy more.

It drops to 800 yen.

You buy again.

It drops to 600 yen.

Even then,

“Since it has dropped this far, it will surely return eventually.”

You think.

However, if the very reason that stock was 1,500 yen was because,

“It was a market where any biotech stock would be bought,”

then there is no reason for it to return to 1,500 yen after the biotech market has ended.

1,300 yen might not have been a low price, but simply a point on the way from 1,500 yen to 600 yen.

For the first time here,

“Buy when it drops”

—an action that had been correct until then—

“Keep buying things that are falling indefinitely”

turns into a dangerous behavior.

Investment methods that were correct until now become the exact opposite.

The biggest thing I learned from this experience is that

there is no absolute right answer to investment methods themselves

.

In a bull market, buying the dip is strong.

However, if the market collapses, what you thought was a dip is just the middle of a decline.

In a thematic stock market, you can make large profits by riding the momentum of popular stocks.

However, when the theme ends, believing in that momentum leads to large losses.

In other words,

when the market environment changes, investment methods that were correct until now can become the exact opposite.

Even the same action changes its meaning depending on the market environment.

Success experiences are more troublesome.

If you fail, you doubt that method.

But if you succeed, you don’t doubt it.

Rather, the more you succeed, the more confident you become.

“I have made money many times with this method”

is the experience you have.

That is why I believe that in investing, more than failure experiences, it is difficult to handle success experiences.

Even if you succeed five times in a row in a bull market,

is it due to your own skill?

Or is it thanks to the market environment?

At that point, you cannot tell.

And when the market changes, you finally realize the truth.

You continue using the same method that generated profits until yesterday, yet suddenly you start incurring losses.

At that moment,

do you think,

“I’m just having a temporary run of bad luck”?

Or,

“Has the market itself changed?”

are you able to consider that?

This is where a major difference arises.

The reason I still look at the “market environment” first

The reason I currently consider the underlying market environment before looking at individual stocks is because of this experience.

Is it a good company?

Is the stock price undervalued?

Are the earnings growing?

Of course, all of these are important.

But before that,

Where is the capital flowing right now?

Why is that stock being bought?

Is the premise behind that still holding true?

You need to look at these things.

And most importantly,

“Is my investment method correct?”

is not the question.

“Is this method still correct in the current market?”

is what you must keep asking.

In investing, there are moments when you must discard the correct answers of yesterday.

That does not mean your past self was wrong.

It was correct yesterday.

But today is different.

That is all there is to it.

If the market has changed, you must change too.

Having continued to invest for 15 years, this is one of the things I consider most important.