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Rule no. 1: Don’t chase pt. 1

18 May 2022

Rule no. 1: Don’t chase pt. 1

There will always be opportunities to make money in the financial markets even during bear (down) markets. But do not chase.

You want to join in and make money like your friends.

Getting started with investing

When you start investing, you were likely inspired by friends, family, colleagues, or classmates. They shared with you how much money they have made on investing. You would like to make extra money in addition to your regular day job. You wish to be able to buy that house or car of your dreams, or afford the lifestyle you like. But you don’t want to gamble with your money trying to achieve these dreams. So, you are intrigued by investing. It doesn’t seem like gambling. But where should you start?

You don’t know anything about investing besides the stocks (companies) that your friends have talked about. Maybe their successful stocks are a good starting point after all your friends made good money on it, and you also heard others talking about the same stocks. You decide that you can’t miss out on this investment. You want to join in and make money like your friends.

There is no limit to how much money you're going to make on this investment.

Don’t get caught by a time-bomb

Most new and less-experienced investors chase the same investments as their friends. This approach leads to a lot of capital (investors’ money) chasing few investment assets. Concentrated investments create excessive demand for a few stocks, which then pushes the prices of these stocks up to extremes. It all seems so right: everyone is talking about these stocks, "these stocks are about to take over the whole world". This must be guaranteed money, and there is no limit to how much money you will make on this investment. It sure is exciting!

It is an explosive situation. You are likely taking part in an investment game sitting on a time-bomb. The hype will not end. But all the hype creates high risk by pushing prices excessively up. This excessive price can reach a point where it's no longer justified. At that point, it is a matter of time before people come to that realization. Prices will start to drop drastically in a quick manner coined as a sell-off or the burst of a bubble.

Warren Buffett (the most successful investor in the last 75 years) is well-quoted for once having said, “Be fearful when others are greedy, and greedy when others are fearful.”.

Pt. 2 will provide a historical perspective and the consequences of chasing.

Read pt. 2 here.

All the best.

\Rasmus & team