Have you ever wondered
when to get into an investment and when to get out?
Almost every bull market
has 3 distinct phases and if you can learn to recognize them it will help
your odds tremendously of getting in while the market still has room to go
up, and get out before you ride it back down again.
Three Phases of a Bull Market
Have you ever stood on
the sidelines of an investment market (Stocks, Bonds, Precious Metals, or
Real Estate) with sweaty palms not sure of what to do?
You wait and you wait
while your friends brag about their returns year after year - but it just
doesn't feel right. The market is so volatile and possibly near a top.
Finally, as this market progresses it seems like the whole world is making
money in this market, except you. You wait and wait but then decide to go for
it. Finally it must be safe. So you make the plunge and enjoy several months
of stellar returns but then the bottom drops out and you discover some time
later that you bought near the peak of the market and it is now well on the
way down.
If this has happened to
you then congratulations, you took the first step and became involved in the
trial and error process of investor education. Now with the second step let's
see how these bull markets act as they progress and see if we can get in
front of the market to be in control next time.
Bull markets typically
have 3 distinct phases. With a little understanding of how a bull market
"feels" and behaves as it progresses through its phases you will be
able to follow along as it progresses. It will give you much more control
over the timing of your investments.
In any bull market there tend to be 3 phases
Phase 1. The "Denial Phase - "The first stage of a bull market begins just as its last bear
market is ending. In fact after a true multi-year bone-jarring bear market
very few people are even interested in or even watching for a bottom. As an
example consider the stock market in the early 1980's, for the more than 16
years this market had gone nowhere. In 1966 the Dow Jones industrial Average hit
1,000 and in late 1982 the Dow was again at 1,000. It had zigged and zagged for these 16 years but ended up roughly where it
started. For the "buy and hold" investor this period was a bust.
Most had given up on this sector and were instead paying a lot of attention
to the hot sectors of the day, bonds and precious metals. Since asset classes
trend up and down in long cycles with many smaller "counter-cycles"
in them people who have been trying to "time the bottom" have been
caught time and time again buying into the "counter-cycle" rallies.
They were thinking that they had finally found the bottom of the market- only
to have the bottom drop out of the market, once again, burning the investor.
So, once a true bottom has formed many participants remain highly skeptical
that it really is a true bottom and stay away from the market even as the
market continues higher and higher.
Phase 2. The
"Wall of Worry Phase" - This middle stage is where the general public becomes aware that
this new market is moving higher. It is also typically the longest of the
three phases. The financial and stock reporters on TV start to cover this new
sector and interview the experts. To make it "fair" they find
someone from each of the bull and bear camps. Each expert has a compelling
argument as to why the other "expert" is wrong and why the price of
this new market should go in the direction that they think it should. The
investing public usually finds it difficult to take action at this point
because there is so much uncertainty. They have just recently become aware
that this market is moving higher, but in the back of their minds they keep
remembering that not too long ago this market was going down year after year
and they keep thinking of the "arguments" as to why investing in this
market is risky. Examples of this phase include the stock markets in the
mid-to-early 1980's and mid-to-early 1990's. Most of the public was aware
that the stock market was making gains but were slow to aggressively invest
in it because the pain of the past bear markets were still fresh in their
minds.
The term "wall of
worry" refers to the saying that "A bull market has to climb a wall
of worry but a bear market slides down the slope of hope". This is an
important concept to understand. We will discuss the bull market side of this
saying first and then discuss the bear market side later in this article. As
a bull market is advancing it doesn't feel good to the investors during this
phase. The naysayers are everywhere publicly explaining away the recent advances
in this market and explaining why this investment class will soon drop away.
An investor that chooses to invest anyway has to decide for themselves that
this is where they want to be, invest, and hang-on. Only after several years
of consistent gains do the naysayers start to lighten up on their negativity
and allow the participants to start feeling good about the investment they
have made. When the media combines this new upbeat attitude with a chart of
the gains that have happened so far then the mood shifts for the better and
we enter the next stage.
Phase 3. "The
Euphoria Phase" - Finally it feels good. Most of the experts that were decidedly
bearish during Phase 2 have now changed their minds and are spouting the
virtues of this investment class. As the media gets on board with this new
idea and starts to believe in it themselves they
tend to interview the few remaining "kill-joy" analysts that still
think this investment is a bad idea less and less often giving the public an
even more biased view that this investment is "it". Finally after
all these years of searching- mankind has found the perfect investment
vehicle. This is now the "must have" investment and how people get
rich.
The public invests in
this vehicle en masse bidding up the prices higher and higher
accelerating the gains making the investment that much more exciting for
everyone else that has not fully invested yet. However, when the majority of
investors have joined the party then a problem starts to occur. There aren't
enough new investors bidding up the price of this asset to keep the price
rising as quickly-so it starts to slow down. Sometimes bull markets end with
a bang sometimes they carve a long arc on the chart as they top out and start
to head down. This is where the "Bear slides down the slope of
hope". Keep in mind that in phase 3 most everyone is completely
convinced that this investment is almost infallible. Even as the market
starts down people are sure that it is just a temporary setback and stay
invested, often times adding to their positions. An example of this mentality
is at the end of the Dot-com bubble in March of 2000. Both individual
investors and also the large investment houses were so convinced that we had
indeed entered a "new paradigm" that they just could not admit to
themselves that the party was over. They kept "hoping" it would
come back. Many of them rode the market down, wiping out much of their
wealth.
Once the market peaks it
then enters the "bear market" phase which goes through its process
until there are no more sellers left. Only then, when he is long forgotten,
does the bull pull himself out of the ashes to once again repeat the
"bull market" phases many years later.
Does this sound a little
too simple? Don't believe me. Think back to every bull-market you have ever
experienced. Was there a phase 1, a phase 2, and a phase 3?
If you were asked to put
each of the major investments in a current category what phase do you think
we are currently in for real estate? How about precious metals? The stock market?
If you really want to let
this lesson soak in think about these three markets during different decades.
What happened in the 1970's, 80's, 90's and so far since 2000? Do you see a
pattern?