Why “Losses Are the Norm” in the Stock Market
“I can measure the motions of bodies, but I cannot measure human folly.”
by Bob Stokes
Updated: September 23, 2021
Did you know that Sir Isaac Newton "lost his shirt" in the South Sea Bubble of the 1720s?
This great scientist and mathematician lost more than the equivalent of a million 2021 dollars.
Here's a brief description of Newton's investment actions from Robert Prechter's landmark book, The Socionomic Theory of Finance:
[Sir Isaac Newton] invested a little bit early in the trend and "wisely" took a small profit. Watching the trend continue, he finally bet heavily and "wisely" held on for the long run. He eventually sold out at a near-total loss.
After this financial loss, Newton said:
"I can measure the motions of bodies, but I cannot measure human folly."
Newton's unfortunate investment story is instructive because it summarizes why stock market losses have been the norm among investors after a full market cycle.
In other words, investors are typically "timid traders early in a bull market and confident long term holders at the peak."
To drive the point home more starkly, let's look at how investors made out in a mutual fund over a 10-year period versus the performance of the fund during the same time span.
Let's start with this Dec. 31, 2009 Wall Street Journal quote:
The decade's best performing U.S. diversified stock mutual fund [is] Ken Heebner's $3.7 billion CGM Focus Fund, which rose 18.2% annually. …
Here's a table of the mutual fund, showing the growth of an initial $100,000 investment:
As you can see, that initial investment more than quintupled in value as it grew at 18.2% annually, compounded. Quite a performance in a decade when the S&P 500 lost value.
Now, let's look at how much money investors in the fund made.
Let's return to that 2009 Wall Street Journal article:
The typical CGM Focus shareholder lost 11% annually in the 10 years ending Nov. 30...
Yes, you read that right.
Let's return to The Socionomic Theory of Finance for a look at another table of the mutual fund:
The average investor in CGM Focus Fund during that 10-year period turned $100,000 into $31,200 for a loss of 68.8%. That is 94% less than the growth of the money in the fund.
The reason for that loss boils down to "herding" or "following the crowd."
As that Wall Street Journal article said:
These investor returns incorporate the effect of cash flowing in and out of the fund. Shareholders often buy a fund after it has had a strong run and sell as it hits bottom.
Learn how the patterns of "crowd behavior" are playing out here in 2021 by following the link below.
Price Pattern Analysis Vs. Most Market Opinions
Most market opinions are based on events outside the market -- "causality." These pundits believe that the news or "fundamentals" drive stock trends.
But Elliott Wave International has a mile-high stack of evidence gathered across decades to show that this is simply incorrect.
What's more, this evidence also show that the Dow Industrials' price pattern repeats at all degrees of trend -- which makes coming trends and turns in the Dow predictable!
Want to get your hands on our Elliott wave experts' predictions?
Simply follow the link below to find out how.
Reset Your Thinking By Understanding True Market Dynamics
You start by receiving a copy of Robert Prechter's groundbreaking book, The Socionomic Theory of Finance. Thirteen years in the making, STF exposes layers of flawed assumptions and offers you a new approach. The book is jaw-dropping and, at times, an uncomfortable read. STF uses history to painstakingly challenge beliefs. It shows what actually happens in the markets. It does so fearlessly, taking on even the most sacred of assumptions. The book is acclaimed by academics, practitioners and investors alike as a landmark paradigm-setter. It comes in print and online editions and sells for $99. We include it free with your Financial Forecast Service bundle.
Your next step is to be sure to stay alert, on the lookout for danger and opportunity. The Financial Forecast Service equips you to do this.
Your Financial Forecast Service Team Helps Put YOU in Control of the Market’s Trends and Turns
Your Financial Forecast Service guides -- three of the best-known market analysts in the world:
- 1. Robert Prechter, Author of 16 market-related books, New York Times Best-Selling Author and Editor of Elliott Wave Theorist
- 2. Steven Hochberg, Editor of the Short Term Update and Co-editor of The Elliott Wave Financial Forecast
- 3. Peter Kendall, Author of The Mania Chronicles and Co-editor of The Elliott Wave Financial Forecast
As featured in:
Get The Socionomic Theory of Finance FREE with your subscription to the Financial Forecast Service.
At a recent press conference, the ECB President Lagarde said, "...we are not offering forward guidance of any kind." That's a huge change in central banks' modus operandi, and it has a lot to do with the strength of the U.S. dollar, says our Head of Global Research, Murray Gunn -- watch.
You have a choice of hundreds of technical market indicators. While choosing the right one (or ones) may seem impossible, there IS a way to do it -- without overdoing it. Watch our Trader's Classroom instructor Jeffrey Kennedy walk you through charts of TWTR, LMT and CABO to show how he combines Elliott waves with RSI/Stochastic and Japanese Candlesticks for a nicely rounded market view.
Financial history shows that many investors hold onto stocks during an entire bear market. How does this relate to 2022? Here are some insights.