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Market Volatility As a Fee in Investing

My dad has been a coffee farmer since his childhood days. He knows no other better cash crop than coffee. From the old days when the primary type was Arabica until the introduction of Ruiru 11 for its inherent advantages like better production, better resistance to pests and diseases and many more.

He has seen it all unfold in the coffee sector. He has experienced it when the coffee produce did well in the markets and vice versa.

In my early teenage years, when I could understand the coffee markets, I was lucky enough to experience the last days when farmers got good returns from their sale of coffee berries.

But that did not last for long. In the last couple of years, the coffee sector has been hit by several issues, and it has become the topic that politicians use to woo voters to elect them into office. All gubernatorial candidates of Nyeri county do have the first few pages of their manifestos set aside for the coffee farmers.

As a result, many have neglected coffee as a cash crop and gone into other ventures like dairy farming or macadamia nuts. Coffee farmers were the laughing stock of many villages. It was considered an economic activity for the old and unwise men.

They were right but only for a short time. This year, the coffee produce did so well that all farmers who had neglected coffee as a cash crop regretted it. Everyone is now in the nursery beds looking for coffee seedlings to plant. Coffee is currently the cash crop that everyone is running to. It is on everyone’s lips.

Everyone now believes in coffee farming as a productive economic activity.

Market Cycles

If there is anything that has taught me about market volatility, it has to be farming.

The behaviour of farmers is no different from the behaviour of investors in the stock market.

When a particular crop is doing well in the markets, all farmers want to neglect everything else and plant that crop. And when it’s doing poorly, no one wants to farm it anymore.

We often forget that the investing market has cycles, just like we experience different seasons during the year.

“you need to understand that the market is going to go down sometimes. If you are not ready for that, you shouldn’t own stocks.”

Peter Lynch

No One Wants To Be In A Bear Market

People will always run where the “money is being made.” No one wants to hold onto an asset when it’s depreciating.

The opposite is also true. No one wants to miss out on a bull run. Even if thin air is on a bull run and hitting all-time highs, most investors will put their money in that thin air.

If you look at how people decide which assets they will invest in, they go with the market hype. They go with the hottest thing at the moment until it’s not hot again. For the last few months, it’s been crypto and NFTs. Now, no one is talking about them.

Fear And Greed

That’s why fear and greed are the two most significant forces in investing. These are the two forces that separate winners and losers.

As an investor, the last thing you want to see is witness your portfolio shred some of its value. Even if you can afford to lose some of the money you invested. No one wants to be in a bear market. We all want to be investing in assets that only go up. At least for the majority of us. Bear runs are not comfortable at all. They’ll have you rethinking your choices and comparing yourself with others who chose different assets.

Be fearful when others are greedy and greedy when others are fearful

Warren Buffett

Embracing Market Volatility

If you want to know the right personality or character of most investors, study them during bear markets. On bull runs, everyone thumps their chest and imagines themselves as the next Warren Buffett or Jim Simons.

All investors step back in bear markets and stick their tails between their legs. No one is even confident enough to say what assets they are invested in. Others stop believing in investing at all. They panic, sell and liquidate their positions.

Market Volatility As a Fee in Investing

As Morgan housel wrote,

“Market returns are never free and never will be. They demand you pay the price, like any other product. You’re not forced to pay this fee, just like you are not forced to go to Disneyland. You can go to the local county fair, where tickets might be $10 or stay home for free. You might still have a good time. But you’ll usually get what you pay for. Same with markets.

The volatility/uncertainty fee- the price of returns- is the cost of admission to get returns greater than low-fee parks like cash and bonds. The trick is to convince yourself that the market’s fee is worth it. That’s the only way to properly deal with volatility and uncertainty- not just dealing with it, but realizing that it’s an admission fee worth paying.”

The Bottom Line

Looking at the S&P 500 over the last 20 years, half of its best-performing days have come in bear markets. Another 34 per cent of the best days happened in the early days of a bull run. That’s when no one is sure if it’s a bull run.

As Tom Gardner wrote in the Motley Fool,

“The biggest cost in investing is the emotions of being uncomfortable, uncertain about the future and wondering whether you are doing the right thing. These costs are in magnitudes larger than fees paid to advisors. Their currency is stress hormones rather than dollars.

A lot of investors realize they can’t afford these costs and quit. Paying them, for those who can, is as worthwhile as it’s ever been. All you have to do is keep your head straight and not screw it up. That’s the most valuable investor can possess.


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