Financial Market Zoo
The financial markets are a confusing conundrum that many people want to play in but don’t
understand so they run away from it all together.
Financial Market Zoo
There are many mitigating factors that contribute to market performance. Some that don’t are used
as market indicators, but end up confusing people even more. Then you have books, like the one
form Michael Lewis, that show the markets are rigged for those in the know so there is no chance of
ever making money in them.
In a way this is true yet also false. Markets, at their basic component, are supposed to be fair and
balanced, per Adam Smith in The Wealth of Nations, and this should be the responsibility of the
government to ensure it stays that way.
All markets will have people that will push the envelope and eventually become regulated.
We have to work from a position all markets are fair but not equal.
It is that inequality that we want to take advantage of yet we need to understand how the
Instead of thinking of the markets as this intangible object, let’s look at the markets in a
different light. Imagine you are in nature.
The markets consist of the canyon, the valley, the mountain, and the rivers that flow through. The
individual animals are the investments you find in the markets - participating in their little
ecosystem, having ebbs and flows, contributing to the overall eco system.
The two main leaders in the ecosystem are the bears and the bulls.
Bears hibernate for periods of time, and when not hibernating they move slowly, methodically,
plodding along. When you hear the term Bear market, this is exactly what it means. It’s a slow and
methodical market, usually bringing low or negative returns and can be prolonged.
A bull market, by contrast, can be very aggressive and have large upswings and downswings. You
can make money in both markets if you know what you are doing and understand to read the signs.
Like the seasons, which can be unpredictable and are cyclical, so are the markets. A bear or bull
market can come on quickly for a variety of all reasons and can disappear with a bang or a
There is a third type of market that exists which is never talked about.
This is the river market. The river market is a mixture of both markets. Think of the river market
like a combination of Spring and Fall. The snowcap melts and the river overflows in the spring
bringing both bulls and bears to the river for water. As the river flows it energizes the bulls and
bears and they must compete with each other to see who will take over.
River markets happen more than a bull or a bear market, but are also harder to predict. They can
flood or dry up; whoever is stronger will thrive, sometimes the bull, other times the bear.
Financial Market Zoo
How do you handle these markets? Through planning and preparation.
Like the bear, you need to stock up on rations, cash for buying opportunities or evening out your
portfolio, so you create some hedges against risk.
Since a river market can flood or a prolonged drought can cause you to starve you need to
understand how the animals, or investments, will react to both situations and plan accordingly. Are
you prepared for a flood? At your house you might have flood insurance, in the investment
ecosystem there might be other protections. This is all part of having a financial strategy that can
help you accomplish what you want.
As investors part of our financial strategy is to gather resources as much as possible.
The question is….how do you go about it?
There is always talk about diversification and the need for it. What is diversification, though?
The dictionary definition is “spreading out a resource among different avenues.”
This seems to make sense, but what most people do is they spread a resource out among the same
things. For example they might do 25% in large company stocks, 25% in international, 25% in mid-
company, and 25% in small company. They are diversified among stocks but they are still stocks
and have similar risks.
Which is why you need to think about diversification like owning a zoo.
In a zoo you are not going to have 80 lions and nothing else. You are going to want a diverse
amount of animals so that if one is not feeling well you can utilize other animals to balance out your
zoo. Having diversification among animals and types of animals creates a draw and a natural give
and take among the zoo.
So you need to collect different type of animals and diversify your zoo experience.
The same can be said for a business owner or a financial advisor. The more diverse your exhibit the
better and more attractive for your business. Diversification is a good thing, both in the investment
and the business world. You need to think of each client or investment as an exhibit for the goal
you are trying to accomplish.
So how are you diversified?
Do you have one exhibit with many animals?
Are you spread too thin with not enough animals in your exhibits to make them
Financial Market Zoo
This is where strategy comes in….a laid out strategy and an execution process of how you are going
to do it is important.
1. You start with one animal.
2. Then you add another, and maybe a couple more.
3. Then, you pair up the animals so that they sustain themselves naturally; you
might get three or four pairs so they can keep doing that.
4. Once that is accomplished you then attempt to get other animals and keep
expanding your exhibits and your zoo.
Every once in a while you need to sell some animals or donate them to other zoos to make your zoo
more healthy, effective, and efficient. This would be called rebalancing and re-optimization
depending on how often you do it.
While I use the zoo analogy, really think of it like a wild animal park where everyone roams freely
but you have several distinct exhibits all contributing to the success of your investment ecosystem.
So let your assets, your customers, roam but make sure you put them together in an efficient
manner that allows you to utilize them in a way that will help you as well.
You need to nurture them but you also need to be smart about working with them as well.
Do you have the right strategy?