The critical question that investors face in all three of these comparisons is one of generating gains through exceptional market timing with cyclical markets, or generating gains through exceptional patience with linear markets. As much as we would all like to think of ourselves as a “guru” who can accurately predict every market gyration, the fact of the matter is that we can’t.
Even the best, brightest, and smartest market analysts are scarcely better than 50-50 with their market predictions, and many are much worse. What frequently happens is that many people fail to respect the market, and ultimately pay the price through losses. Intelligent investors must understand that the market does not do what we think it should do … it does what it wants to do. What this means is that prices are set by buyers and sellers. Sometimes prices climb to absurd heights, and sometimes they drop to ridiculous lows. We can generate a general sense of when prices are elevated vs. depressed with a reasonable degree of accuracy, but nobody knows when the market will turn … nobody.
The overconfident investor frequently believes that he can pick markets correctly, and jump onto price trends for easy gains. This strategy typically works until it doesn’t work, and when it doesn’t work, it REALLY doesn’t work. Leveraged gains are wonderful, but leveraged losses are devastating. Any time that successful income property investing means that you need to correctly time the markets, you are setting yourself up for big losses in the future when you eventually guess wrong, and cannot get out without taking a substantial loss since property is illiquid. This reluctance to take a loss can make a substantial loss grow into a crippling loss.
Where this ultimately leaves us is with determining the best way to protect ourselves against the impact of our own overconfidence. This is where linear markets become so powerful. When a market does not grow or crash explosively, the timing of when you buy becomes less important. This takes the achievement of investing success out of market timing, and places it into the realm of prudent savings, intelligent investment, compounding of gains, and repeating the process until you have achieved financial freedom.
With investing, just as with life, the most successful strategies are frequently the least exciting ones. It’s fun to imagine going from zero to riches in an instant, but that is not a reliable strategy. Some people do garner windfall profits, but you cannot depend on windfall profits for your financial future. Intelligent investors understand that the path to long-term success is one that involves many prudent decisions. Instead of relying on a single “big deal” to catapult us to success, rely on making one good decision, then another good decision, and then another good decision. Over time, the impacts of these decisions will compound as we steadily and reliably march toward financial freedom.
