reHH During a bear trend with declining sentiment one appears to be taking on RISK with NO REWARD. Meaning that if I own a stock and am expecting good news it might barely revalue higher or even go down on good news. If news is bad on the other hand I will often see a sharp decline in share price. At face value this, again, translates to RISK with NO REWARD and only a fool would take such a bet…
However there is a flip side to that coin. When we enter a bull trend with increasing sentiment we will often see returns of 100%-200%, from sentiment low to high, without a company having added much in terms of value. If a company comes out with good or at least exciting news we might see a big revaluation higher (undeservedly so). Case in point would be Garibaldi Resources which reached a Market Cap of around $400 M on drill hype alone and before any actual assay results were out (No risk or fundamental change but great reward thanks to sentiment). Bad news will often see a soft reaction and there might even be a lot of “bargain hunters” that find a company “too cheap” when it is down 10% even though it should be down lets say 30%. So in a sentiment uptrend it becomes REWARD for NO RISK and even when bad news rears its ugly head we often just get a slap on the wrist.
… So in a sense being invested in a highly sentiment driven sector is like playing in a rigged casino at face value. During sentiment downtrends it’s often a lose/lose proposition, which is why it is so frustrating, and the house will make you poorer on paper. It’s akin to putting money on the Roulette table and lose a lot if it ends up on red and lose some if it ends up on black. In contrast, during sentiment uptrends the game is rigged in our favor, and we win a lot more and a lot often than we deserve.
What most people end up doing is of course to get in when it feels easiest (near sentiment peaks) and then sell out when it is hardest (near sentiment bottoms). In other words they might catch a bit of the ending move up during the good times and walk away in disgust during the hard times. The gains they were able to accrue on paper as they caught the last part of the bull leg will often not cover the paper losses ,which they turn into real losses as they sell, at the end of the bear leg. Basically the majority gets in too late (way after the bull leg has started) and leaves too late (way into the bargain territory when they should be buying while the next leg up gets closer).
An ounce that is worth $10 in the ground might trade between $2 and $20 dollar as sentiment oscillates between high and low. Our job is to buy ounces for $2/oz and sell at $20/oz. You can only buy it for $2/oz when no one wants to buy it and everyone wants to sell it.
The longer and deeper a correction lasts where the game is “rigged” against us the closer we are to an upturn when it is “rigged” in our favor…
The secret is KNOWING that the tide ALWAYS CHANGES. ALWAYS.