To Navigate a Bear Market, Embrace This Important Principle
The first rule is to accept — and not fight — the Pareto Principle.
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The Pareto Principle says that 80% of the time, you won’t make much money in the stock market. Embrace that fact rather than fight it.
The one great certainty of all markets is cycles of ups and downs. Every market, from cryptocurrencies to tulip bulbs to stocks, goes through boom and bust phases. It is inevitable because of the ups and downs of human emotions. It is one thing that will never change.
Although everyone is well aware of the inevitable bear markets, they always cause pain because they are extremely difficult to anticipate, and we are never fully prepared for them. Every bear market is different in various ways, and there is no simple formula for dealing with them.
The cyclical nature of markets goes hand-in-hand with the Pareto Principle, which is also known as the 80-20 rule. The rule states that approximately 80% of the effect of something comes from 20% of the causes. Twenty percent of the time, your efforts will produce the desired results, while 80% of the time, you are spinning your wheels and not making any money.
For example, in most businesses, 80% of revenue often comes from 20% of customers. In economics, it has been observed that 80% of the wealth in the world is controlled by 20% of the people. There are numerous other examples of this rule in economics, business, and science.
In the stock market, most traders and investors will produce the majority of their profits in a relatively small window of 20% of the time. 80% of the time, they are chopping around and making no progress at all.
vWhen you are in tune with the shifting market action and your strategy is working, you will produce the bulk of your gains, but 80% of the time, you are working on getting in sync with the market and trying to avoid losses. This is nothing more than the Pareto Principle at work.
The problem with cycles and the Pareto Principle is that we never know when things will turn. All we can do is stay ready to react when the good times start to roll.
The best way to deal with the stress and anxiety of difficult markets like the one we are currently experiencing is to simply recognize that this is one of those periods when we aren’t going to make money. The main reason that most folks feel so frustrated is that they are fighting the fact that the market is not producing good opportunities. We want to keep trying to call market turns or load up on stocks that should bounce but never seem to.
The nature of the market beast is extremely difficult at times. Embrace that fact and focus on preparing for the 20% of the time when you will rack up big gains.
At the time of publication, DePorre had no position in any security mentioned.
