Happy Lunar New Year to All! In the spirit of the year of the Earth Rat, I will be briefly touching on some Chinese philosophy in this post. yin (陰) and YANG (陽), two of the most famous yet widely misunderstood concepts in the world. yin and YANG are opposing yet complementary forces found in all universal processes. The way the world works according to this philosophy has been summed up in one symbol, the Taijitu (太極圖, picture on the right). While most pictures are worth a thousand words, this one defines the natural order of the universe. Here are some basic interpretations of the Taijitu:
- White represents YANG and Black represents yin
- YANG and yin are never separated and one cannot exist without the other - "yang in yin and yin in yang"
- There is a sense of perpetual motion between yin and YANG where equilibrium is never reached.
Day turning into night and night turning into day is a good visualization of the taijitu. Right when night (yin) reaches its darkest point it begins to grow into the light of day (YANG) and when the daylight is at its brightest, the sky already begins to darken.
If Chinese philosophy had to be summed up in one word, it would be BALANCE. Too much or too little of anything is bad. Interestingly, when thinking about balance, one cannot help but to conjure up circular images and words (well rounded, all-around, the geometrical circle). Circles have no beginning or end. Things tend to flow smoothly along curved edges and circular paths have been the foundation of many martial arts, dance techniques and architecture.
Chinese philosophy can be seen in a plethora of real world stages. One of particular intrigue and striking semblance is the financial stock market. In the stock market, there are two key fundamental forces that drives stock movement, buying and selling. These two forces are both opposite yet complementary (sound familiar?). When someone is buying, simultaneously someone else must be selling. Without either force the entire stock market would cease to exist (sound familiar yet?). Just as with yin and YANG and night and day, the natural order when a trend is at an extreme is for it to reverse. So at times of euphoric buying where it seems like everyone is a buyer, most likely the trend has already reverse and the panic selling is soon to begin. On the same note, if everyone is selling and things just get extremely bearish, the buying has probably already begun. This happens all the time and yet only a small handful of investors capitalize on this each year. The reason for this disparity is not that the other multitude of investors do not understand or know about this widely publicized trading adage but rather:
- Emotions - At these extreme points, your emotions will be telling you to do the exact opposite of what you SHOULD do. When the market is dying, fear tells you that the entire financial system as you know it is about to collapse and that companies will go bankrupt. That is enough to stop even the most staunch investors from pushing the buy button. Reversely, when the market is flying, euphoria tells you that the sky is the limit and that bubbles and subsequent crashes were a thing of the past. How can anyone sell their long positions when "it's different this time around" and when you're sure to miss the "greatest bull market of all time".
- Buying at 9:00 PM and/or Selling at 7:00 AM - Continuing with the night and day analogy, lets introduce the clock which will represent stock price movements with the peak being the brightest time of the day and the trough being the darkest time of the night. Many investors simply have bad timing. What usually happens is that these investors will buy at 9:00PM because it has been dark since 6:00PM but they don't realize that they have a long way to go before dawn so as their losses mount, they have no choice but to capitulate to preserve capital. Sometimes an investor will buy at a good time maybe at around 6:00AM and fearing that he will lose his profits, decides to sell at 7:00AM. Even though technically he has made a profit, it is usually not enough to offset his other losing trades and commission costs. Since there really isn't a clock for the stock market. investors can't be fully blamed for their mistiming because without a clock or watch, you would probably be late or early for many events.
- Too Good to be True - Many investors don't even bother looking into these types of trades because "it can't be that easy or else everyone would be rich". Everyone knows from economics 101 and common sense that "there ain't no such thing as a free lunch" (tanstaafl - look it up, its really the acronym) so why get into a trade that seems too good to be true. First of all, from the first two reasons alone, being able to execute this seemingly easy trade is actually pretty difficult. Secondly, this "ain't no free lunch" because all the people who are dominated by their emotions (see first reason) will be billed for however big a lunch you decide to take at their expense.
Disclaimer: I am not an advocate for Chinese philosophy over other schools of thought but merely giving credit to those who predated me in my observations of how the world works. I am not here to tell you how to live your life or how to invest in the stock market. This post have barely even touched the surfaces of both Chinese philosophy and Stock Market Investing and everything is of course my own musings, insights and speculations. There are plenty of books and experts out there on these topics so like my man LeVar Burton use to say on Reading Rainbow, "But you don't have to take my word for it".
Recommended Reading on this Topic: Tao Te Ching, Reminiscences of a Stock Operator by Edwin Lefevre
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