The anatomy of a crisis: the phases
Crises begin for different reasons but flow with a similar rhythm. Knowing the rhythm is a compass in a panic.
#Different causes, similar rhythm
Every crisis is unique: its cause, speed, and duration differ. But the way they are experienced tends to pass through similar phases. Recognizing these phases helps you estimate where you are during a crisis.
#Typical phases
- Phase 1Shock
An unexpected news event or break. Fast, sharp price moves. Information is scarce, uncertainty at its peak.
- Phase 2Contagion
Spread from the first area hit to the others. Normally unrelated assets start falling together - correlations rise.
- Phase 3Capitulation
The peak of selling pressure. "Good" assets are sold too, out of a need for liquidity. News flow at its most negative.
- Phase 4Bottoming
Sharp swings continue but selling pressure eases. This phase can only be seen AFTERWARD; it cannot be known in the moment.
- Phase 5Recovery
Gradual improvement. It usually begins while the worst news is still coming - which is why most investors miss it.
#The most critical observation: phase 5
Recovery beginning while the news is still bad is the hardest part of crisis psychology. An investor who decides based on the news is at their most pessimistic exactly at the turning point.
This does not mean "do not follow the news"; it means do not trade on the news.
#The practical value of phase awareness
Knowing the phases gives you this: in a crisis, instead of asking "what is happening?" you ask "which phase am I in, and what does my plan say for this phase?"
The second question is answerable; the first produces panic.
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