Learning from the trees?
Are thick forests good?
For most people a thick forest with several trees stacked besides each other would seem like a very good thing. After all we have always understood that a thick forest cover is divine.
However, that is far from the truth. The thicker the forest the bigger is the risk of forest fire.
Not only is the probability of fire more but also the severity of fire is a function of the density of the forest.
In order to keep this under control forest authority’s light up small fires that reduces the density of the forest and this act prevents a larger fire in the future. So a little pain now prevents a bigger one in the future.
Which means that a small fire is a boon from a longer term perspective.
The stock market too exhibits this kind of character.
In bull markets, the market continues to rise day after day, month after month producing tremendous returns.
While this may appear to be very good but in the long run this too can hurt investors severely because too fast and unnatural growth of the market is not sustainable and results into a bubble that eventually bursts gulping up large quantums of wealth.
Now like the mini fires prevent a bigger fire similarly the market corrections that we see now and then is also a control mechanism that helps to prevent a bigger and more painful crash in the future.
Therefore as in investor one should take the small corrections in their stride and be happy that these corrections provide opportunities for investing more, which in the long-term, results in more wealth creation for investors.