Late Cycle Investing Principles

Making outsized returns while playing defense

As we approach the later stages of the cycle we need to be very aware of how we navigate such emotional times. There are proven strategies and psychological methods to keep you from doing what people fear most and that is the horrifying round trip. Where you ride the euphoria all the way up fail to take any profits, (or better yet you take profits and then fomo back in at the top) and then watch your gains evaporate in hopes of a rally that never comes. You end up having nothing to show for all the time you spent in the market.

I, like most people in the market have had this situation unfold in my portfolio more times than I’d like to admit. It’s the brutal spiral of hope that most investors face after a market has peaked. As Gann always says in his writings hope is the worst thing you can have when the market is going south on you. It’s what most people cling to when they are stuck in a losing position. They have no plan, no discipline, and they simply hold on and hope that the market turns around meanwhile their gains continue to evaporate.

It’s a hard lesson to learn as people usually get fixed numbers in their head that they want to hit and when those numbers aren’t hit and the market starts moving against them they find themselves quickly removed from the psychological death trap of their portfolio all time highs.

Lets take an example. Say you take 50k to 750k and you wanted to hit 1million but the market has topped. You were so close but your gains quickly drop to 500k and you think “okay well I’ll just get out when it gets back to 700k”. Then the market bounces but only to 625k before then dropping further to 350k. Now you think you’ll sell on the next rally but the next rally comes and you think its looking good and you’ll hold out for a few more percent. The rally only gets to 400k in your port before a nasty pullback to 200k. Now you don’t want to sell because your down over 70% and it may be close to the end of the pullback but its really a full on bear market starting. By the end of it you ride your gains all the back to your starting capital or worse zero.

This story probably sounds familiar to you if you have been in any winning position in any market. Its the story of hope and I know its happened to me. But without all the grief and despair it’s hard to learn these lessons and without them we would not be here today.

So how do we avoid this disastrous situation? We have a plan and we stick to that plan with iron discipline.