Thoughts on Taoism, Rip Currents and Market Cycles

Success in any endeavor will likely emanate from a core philosophy, which is then carried out by specific actions or, in many cases, inaction...

"Thus what we gain is Something, yet it is by virtue of Nothing that this can be put to use." ~ Lau Tzu

A significant piece of a core philosophy, if you've not already noticed, that is implicitly and explicitly employed here at TFP, is the Taoist philosophy that may be expressed in modern terms, such as "less is more" and "going with the flow," which are woven into to the profound Taoist respect for nature:

• The pliable reed bends in the strongest of winds, the hardened tree breaks.
• The weak does not contend and so no one in the world can quarrel with it.
• The high and low incline toward one another; therefore the lowest position is the strongest -- the ocean is stronger than the rivers because it is in the lowest position -- all rivers flow to the ocean.
• The weak becomes the strong; however the strong becomes the weak.  Without the one, there would not be the other. 
  
• Everything has its natural cycle and there is no changing this cycle; therefore it is not wise to go against nature -- one should flow along with it.

"In the world there is nothing more submissive and weak than water.  Yet for attacking that which is hard and strong nothing can surpass it." ~ Lau Tzu

I enjoy teaching my two young sons about nature (and life) when we visit the beach, which is only eight minutes from my house.  Living on the coast of South Carolina, my favorite metaphor for passivity (not fighting nature -- going with the flow) is the ocean, specifically rip currents.  Water is inviting and provides peace and comfort, yet its strength is tremendous and worthy of great respect.

As the immediately preceding quote from Lau Tzu suggests, water will (sooner or later) break anything that rigidly stands against it; however, offering no resistance to it almost guarantees survival... 

Take a look at this illustration of a rip current from Howstuffworks:

 

Unfortunately and tragically, the immediate panic reaction of the uninformed swimmer is to swim directly toward the shore  (seen at the bottom of the image) -- where there is perceived safety -- yet this is the most dangerous escape route.  The safest escape is to swim away from (or perpendicular to) the shore -- the least likely of routes the uninformed swimmer would consider. 

Swimmers do not drown as a direct result of the rip current itself -- they drown from the exhaustion of unknowingly going against nature -- and in some places in the U.S., more people die each year in the face of rip currents than from thunderstorms, hurricanes and tornadoes combined.

"Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes." ~ Jesse Livermore

Bringing the point back to the nature of financial markets, the unknowing investor can suffer tremendously by acting as if the markets are not cyclical -- as if history does not rhyme -- as if "things are different this time." 

The truth is that markets will always revert to the mean -- what goes up, must come down and vice versa -- and the denial of this is where investors make their most fatal mistakes.

The quiet but powerful message delivered by ancient philosophy, whether it is Western or Eastern, is that human behavior does not change.  If Lau Tzu observed and warned of greed more than 2500 years ago, then a reasonable person may assume that human behavior is not likely to change any time soon. 

The rip currents of financial markets, and life itself, will claim many casualties as a result of inexperience.  This inexperience, however, is not equivalent to a lack of academic knowledge -- it is a lack of self-knowledge, humility, and a lack of respect for nature -- it is the lack of willingness to bend like the reed.

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Suggested Reading: Tao Te Ching (Penguin Classics)

Related Post: Mind vs. Brain Part II: Priorities, Pursuits & Productivity

Related Page: Quotes on Contentment

Comments

[Rådgivende ingeniør]

Great diagram and what a very nice thoughts and message. Thank you for sharing.