With the US stock market now entering its 9th year in a bull market phase, it’s probably a good idea to reflect on some old age wisdom, which is nicely explained in the following quote;

Bull markets are born on pessimism, (think back to 2008/9 after the collapse of Lehman Brothers, who in their right mind wanted to invest), grow on scepticism, mature on optimism and end on euphoria

The question is where in the cycle are US markets today.  The reference to the most hated bull market in history is a clear sign of the scepticism, which has been a hallmark of this extended bull market, only recently there appears to a change in sentiment, which could be ascribed to optimism.  You will hear market commentators refer to synchronised global growth, which is expected to drive upward earning revisions and therefore potentially even higher share prices.   I would argue the broad US stock market is clearly in the mature phase of the cycle with certain specific sectors reaching euphoric levels.

The difficulty for investors is the proven fact that it is impossible to call the top and / or bottom of a market cycle and as herd animals it is very uncomfortable for us intuitively to go against the herd.  We would rather be wrong with everyone else than risk being wrong all alone.

What we do know is that to generate real (inflation plus) returns we must be invested in the stock market, what we don’t know is how the stock market is likely to behave or should I say misbehave over the short-term and when I say short-term I am referring to the next 5 years.  Its almost a bit like saying “you damned if you do and you damned if you don’t”.

Warren Buffet arguably the most successful investor of all times, has the following bit of advice for investors, “be greedy when others are fearful and be fearful and others are greedy”.   He is of course referring to our “herd” behaviour, which we find so difficult to avoid.

If we can’t time markets and we need to be invested what should we do when markets appear to be at euphoric levels.    Quite simply we should not be buying the market.  This is where and why active management underpinned by a value philosophy has been such a successful investment strategy through the ages and will survive the recent massive demand for passive investment solutions, which offer low cost participation to the market.  Most passive investment solutions are price / value agnostic effectively buying the market at any price and thus doomed to simply follow the herd vs. the active manager who invests in specific businesses, which are priced at their intrinsic value with little risk of permanent loss for the investor through the cycle.

 

Mark Williams
Mcomm, CFP®, HdipTax
T. 021-851 3746
Email. service@synfin.co.za

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Dammed if you don’t
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