5.3 Interpreting Expectations Environment

Most of our lives revolve around large-scale group expectations. Whether we are being affected by the rise or fall of expectations, they influence our perception of the environment around us. If our local and or regional economy is expanding on high expectations of growth of a specific product or service, then we will perceive and expect the world around us is getting financially better. If our expectations are falling then we will assume they are getting worse. A positive response is always met with an equally negative one. Predictable outcomes are the ones that have either a positive or negative effect on our perception of the world around us.

Most of our good feelings are compounded positive events around us that act as a domino effect on building our enthusiasm. But as with dominos eventually they will all fall and we will need to reset them. We will have some negative events in this otherwise positive environment. The multiple events that contribute to the larger event are predictable, but if the overall expectations are building the positives will outweigh the negatives.

In a bull market, more stocks are going up than going down. Some individual market sectors can move higher than others in a bull market. If the overall stock market is building expectations, it would be safer to buy stocks that have low expectations, since they are more likely to beat expectations than a company whose expectations have outpaced the market.
When our expectations are falling, negative events outweigh positive ones. Our perception of the world around us is clouded by overwhelming negative feelings. Although there will be some positive events, the negative ones will outweigh the positive ones.

If we are in a bear market more stocks are going down than up. When a market is lowering expectations, it is better to sell stocks that have high expectations, since they will more likely miss expectations than a company that has outpaced the descent of the market as a whole.

On any given day or moment in time, it is safe to say that there are equally good and bad pieces of news. When we read a newspaper there are both positive and negative articles. A positive article for one person may be a negative one for another. The saying “there are two sides to every story” exemplifies this fact. If country A goes to war with country B and country A wins, then country A will view this as positive while country B will view this as a negative. Depending on where we are in an expectations cycle will determine how we view news events. If we are building expectations then we will see the negative over the positive. If we have met our expectations limit and are descending, then we will view news events as more positive than negative. If we read a headline where four people were involved in a car accident and two of them died, if we are lowering expectations likely we will view the two survivors as positive over the negative of the two deaths. If we were building expectations then we likely will view the two deaths as more negative over the positive of the two survivors. These types of positive or negative reactions gives us insight to whether a group is building or lowering expectations. The way a person or group of people reacts to news is the most obvious way to determine what part of the expectations cycle they are in. A hopeful response is a sign of lowering expectations while a reluctant one is a sign of building expectations.

The environment around us creates a backdrop to events that enfold in it. When expectations are building, there will be more positive events then negative. When expectations are being lowered there will be more negative events then positive. The direction of expectations determines the backdrop. To determine the change in direction of expectations we must be able to measure them. As discussed earlier, we must challenge every piece of bad news and view it as good and vice versa.

5.4 Measuring Expectations

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