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Take yourself back to early 2009. We had been living through a very bad bear market since late 2007, the worst such grinding bear market since 1974. For many investors, this was a new experience. They came into investing for the first time in the bull market of the mid 2000s, off the back of the resources boom driven by China’s rapid urbanisation. All their experience suggested that the stock market only went up. If the stock market slipped off its last peak, it turned out to be only another correction, which was a buying opportunity.

Through 2008 some of these investors had been still hoping, against all odds, that the rallies through that year were the start of a new bull market and had been buying. As each short-lived rally failed and the market plunged to new lows, they realised why these rallies in a bear market are known in the trade as sucker rallies. The suckers buy into these rallies, while savvy investors use them to sell stocks that are not performing.

By early 2009 we had been in a bear market for just over a year and these same investors finally began to realise that the stock market also goes down. When the stock market eventually began to rise in April 2009, they judged it to be only another rally, rather than the start of a new bull market. For many, this confrontation with market reality was very frightening, as it wiped out a great part ...

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