Trends Have No End, Only Cycles
Having spent so many years navigating the ups and downs of the stock market, I am more convinced than ever that equity investing boils down to just two words: market cycles.
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| <Image credit: Fidelity Investment> |
There is no such thing as permanent value in the stock market; there are only shifting trends that take turns dominating different periods. What was highly sought after yesterday won't necessarily stay in the limelight today, and the "bad stock" that nobody wants right now doesn't mean it won't have its day to shine tomorrow. The future of a stock is always an unknown variable.
Think back to a few years ago when the world was trapped in a super low-interest-rate environment. Real Estate Investment Trusts (REITs) were the absolute darlings of local Singaporean investors. Back then, who didn't have their portfolio packed to the brim with REITs? High dividend yields and stable cash flows made them look like the ultimate safe haven. All blogs, YT channel talking about REITs and it's a Hot topics.
But look at where we are today. With interest rates staying high, many are quietly doing the math and feeling a sense of anxiety, asking themselves: "Why on earth did I buy so much REITs back then?" , trying to diversify or move away from REITs.
Meanwhile, local bank stocks (like DBS and OCBC ) are currently riding high, with earnings and share prices hitting new peaks. Now, everyone is looking back with regret: "If only I had bought fewer REITs and hoarded more bank stocks instead."
Does this mental loop sound familiar? In behavioral finance, this is a textbook manifestation of a concept known as **Regret Aversion**.
**Regret Aversion:**
A common human psychological defense mechanism. Because we dread the emotional pain of looking back and feeling sorry for a decision we made, we often make irrational choices in the present to avoid that feeling.
If history is any guide, the current banking boom is simply the beginning of another cycle. Imagine if the macroeconomic cycle shifts again over the next few years and a recession actually hits. Won't we just relive the same pain we felt before? When that time comes, will today's banking investments look like yet another "huge mistake"?
This phenomenon is nothing new under the sun. The exact same drama just keeps repeating itself, changing only the sectors, the timing, and the faces on stage.
The Two Faces of Regret
In our investing journey, regret typically torments us in two distinct psychological forms, constantly testing our discipline.
1. The Hesitator's Regret
This is the pain of *inaction*. You watch a stock shoot up like a rocket, but because you hesitated, didn't pull the trigger, or invested too little early on, you missed out. Watching others make massive gains while you sit on the sidelines triggers a profound sense of FOMO (Fear of Missing Out).
2. The Buyer's Regret
This is the exact opposite , the pain of *action*. You finally build up the courage, pour your hard-earned capital into an asset with high hopes, and the market immediately turns around and slaps you in the face. As the price drops, you plunge into endless self-blame, wondering why you couldn't just keep your hands still.
To combat these two inescapable forms of mental torture, we can borrow two highly practical mental frameworks.
Strategy: "Minimax Regret"
In decision theory, the Minimax Regret approach doesn't try to guess the absolute best future outcome, because predicting the future is impossible. Instead, an investor looks at every worst-case scenario and chooses the path that results in the "least worst" regret if they turn out to be completely wrong. Simply put, it's not about maximizing maximum gains, but about minimizing the maximum possible pain.
Framework: Regret Minimization
Popularized by Jeff Bezos when he decided to start Amazon, this is a long-term psychological projection. You project yourself decades into the future, say, at age 80 and ask: *"Will I regret not taking this opportunity?"* In investing, this mindset anchors us to high-quality, long-term assets, helping us block out short-term market noise and resist chasing speculative fads just out of FOMO.
Because the market behaves like the four seasons, where different sectors bloom at different times i.e patience is mandatory. We must avoid jumping into scorching hot sectors, refuse to panic-sell at rock bottom, and stop comparing ourselves to peers who seem to be "making fast money." Every dog has its day; every solid sector eventually gets its turn in the sun.
Recency Bias and the Echo Chamber Trap
Why do we constantly fall into this trap? Blame it on a natural flaw in human wiring:
**Recency Bias**.
Our brains are naturally forgetful. We tend to over-weight recent events and naively assume that current conditions will continue indefinitely into the future. When a sector rallies for months or years, the positive news starts creating a powerful **feedback loop**.
This narrative gets magnified in chat groups, news outlets, and social media. Everyone hears the same good news, and this shared optimism inflates our confidence, making us believe we have cracked the code to effortless wealth.
**The Danger of Feedback Loops:**
Rising prices breed widespread optimism, which attracts more capital, which in turn drives prices even higher. When this loop reaches its crescendo, market risk is usually at its absolute highest.
Furthermore, modern index construction methods, specifically **Market Capitalization Weighting** silently add fuel to the fire.
In a market-cap-weighted index, the larger a company's valuation grows, the higher its weight becomes within the index. When a sector (like AI stocks in the S&P 500 or banks in our local STI, the three major Singapore banks (e.g SG Big 3 Banks DBS, OCBC, and UOB) dominate the index, making up roughly 50% of its total weight.) explodes in popularity, passive funds and ETFs are forced to buy even more shares of these exact companies. This mechanism funnels capital disproportionately into the largest players, causing already massive sectors to balloon further. But is this growth driven by genuine underlying business value, or simply by the mechanics of automated fund inflows? It’s something worth pondering.
A Game of Probability, Not Certainty
Investing is ultimately a game of probability, not a science of certainty.
In the short term, markets can be wildly irrational. When the sentiment is right and the liquidity is there, stock prices can fly to mind-boggling heights. For instance, people today love to debate whether a flagship local bank like DBS can hit $80 in the short run.
Technically and emotionally speaking, of course it can. Short-term markets can make any number a reality. But as rational investors, we cannot bet our retirement on short-term market madness. The real question we should be asking ourselves is:
"At current historical valuations, what is the **probability** of achieving a superior, compounding long-term return by buying in right now?"
Once the economic cycle turns, the macro environment, interest rate margins, and non-performing loan calculations will change completely. The flawless financial ratios we celebrate today could look like heavy anchors in the next downturn.
Navigating a High-Inflation Outlook
As discussed in previous blog post, our global economic backdrop is pointing toward persistent, structural inflation driven by a continually expanding money supply. How should an investor react when faced with both high inflation and rotating sector cycles?
If you are still in your **accumulation stage** and have a steady stream of fresh capital to deploy, two strategies are worth keeping on your radar:
DCA into Broader Index Funds:
Since we acknowledge that we cannot consistently predict which sector will win the next cycle, a Dollar-Cost Averaging (DCA) approach into broad, diversified index funds makes a lot of sense. It automatically spreads risk across multiple geographies and sectors, filtering out the violent swings of any single industry.
Accumulate the "Unloved" Sectors:
Allocate a portion of your cash flow to fundamentally sound assets or sectors that are currently sitting at the bottom of their cycle, ignored or even dismissed by the crowd. The key here is ensuring these businesses possess rock-solid balance sheets and real, cash-generating underlying assets. We collect our chips quietly while others are fearful, and patiently wait for the seasons to change.
Final Thoughts: Staying Humble Before Mr. Market
At the end of the day, long-term investing success isn’t a test of raw intelligence. In an era where information is highly accessible and markets are largely efficient, most investors have access to the exact same corporate data and news headlines.
What separates long-term winners from the rest is not the depth of their knowledge, but their daily behavior and emotional control when dealing with volatility. Rash decisions to chase a rally or panic during a dip may seem insignificant on any given Tuesday, but when multiplied by the compounding effect over ten or twenty years, they dictate your ultimate financial destination.
Never grow overconfident in front of "Mr. Market." Stay humble, respect the power of cycles, think in probabilities, and constantly watch your own behavioral biases. That is how we survive, and thrive, for the long haul.
所谓：
股票高处不胜寒，小心驶得万年船 ！
敬畏市场：涨得越高的股票，往往伴随越大的波动。追高需谨慎，切忌贪婪。
控制风险：在交易中保留一份清醒，严格执行风险管理，永远把资金安全放在第一位。
Till next update:
Cheers!
STE
Further Reading: More on Market Cycles
Investment Clock : What Time Is It ?
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