In case you haven’t noticed, this is a bull market. Everyone loves the bull. Past market cycles always seem rational and explainable, but the future, even the short-term, is hard to predict. Hindsight is always 20/20 when it comes to everything. Markets work because there will always be buyers and sellers at every single price point in or with every stock, bond, ETF, REIT, or MBS hits. This is for the simple fact that no one in the market knows everything. What is a good buying point for one individual maybe the perfect selling point for another. Every time we consider any investment whether it be a new home or a stock trade, we are subconsciously running through all the factors that help us decide whether this is a good deal or not. We have to come to the decision as to whether the current price of an investment is over or under what the value will be at a future point in time. Once enough individuals are making these decisions, the market starts taking on the characteristics of the group. So if everyone is optimistic of growth then the market becomes optimistic, jumping and leaping ahead. However, if they become doubtful or fearful the market becomes volatile, like we saw in February.
Whenever a bull market gets some age on it, then fears and doubt start to fade away and you start to see more and more investors chasing after the next big thing. Some of the companies do very well and start to pull away from the rest of the pack. Amazon and Google would be two examples of companies that have succeeded in doing this. Google took their business to a new highest by figuring out that people were going to search the internet and they could sale advertising to others when they searched. Amazon figured out that people would be willing to wait two days to get their shopping delivered to their doorstep and then figured out how to make it work so that it would be profitable to the company. There are a ton of new technologies that are coming out now and have been coming out for the last few years. When these technologies figure out how to make money, those companies will be the next Google and Amazon. All of this growth usually happens during bull markets; when companies are growing and opportunities for research and development are plentiful.
So what does this mean for investors? Well in a bull market you don’t have to be as selective about your stock picks to make a positive return. Now that being said, you should still try to make good selections when investing. However, your missteps will be less in a bull market because market correlation will help protect you to a degree. Think investing in new tech. Just throw a dart at a list and in a bull market you will probably be alright, for a while. The harder part is picking companies that will perform well even when things turn from bull to bear. Companies that will outlast competitors and give you a greater long-term return on your investment are harder to see when everyone is running well.