12 Jan 2018

Retail Investors and Bull Markets

January 12, 2018

To set the stage, a rising market is often called a bull market. This comes from the idea that an attacking bull starts low and moves upward. A bear market is declining, reflecting a bear attacking downward. These vicious characters often battle it out in the financial media as the bulls versus the bears.

As the bull market continues to rage the headlines are beginning to tell a predictable tale. A recent Wall Street Journal article notes a common measure of volatility, known as “the VIX,” recorded its lowest yearly average in 2017. If you are bored or just curious, please reach out and I’ll be happy to explain the VIX. Anyway, the article goes on to highlight how some large investors are shunning insurance against bear markets, insurance they would normally buy.

We are beginning to enter familiar territory where the media will soon comment on taxi drivers offering stock tips, I read somewhere that this cliché actually began with elevator operators or shoe shine boys back in the day.

As the excitement of the bull market becomes inescapable in the media the lay person begins buying stocks. These retail investors are average Americans who get caught up in the buzz and decide to “play” the market.

The great recession of ’08 is disappearing into the foggy rear-view mirror of memory, and besides, wasn’t that about mortgages anyway? A recent Bloomberg article notes: “retail investors in the U.S. are showing the most enthusiasm for stocks since the nine-year bull market began, another signal of growing optimism as financial markets hit new highs.”

The trouble is, these investors are arriving very late in the game, the brokerages are more than happy to sell them stocks, and the brokerage is happy to provide free research reports that say things like “company ABC is a strong buy.” It can be quite convincing in the moment.

Bear & bull cycle after bear & bull cycle there are always individuals who are late to the party, and when the party is over they are left with losses. Large institutions spend tons of money studying market cycles, and can read the tea leaves early. When they leave the party, they move the markets by selling tremendous amounts of stock in droves. The $300 billion-dollar pension fund just called Uber, and didn’t say goodbye! These institutions will return to the protections noted earlier, and will buy things that profit from the very drop itself.

The individual who arrived late is enjoying their first glass of punch only to notice everyone has left and the DJ is packing up. They hadn’t been thinking about selling, are left wondering what happened, and begin making comments about how it’s a sham and just like gambling.

This is not a forecast that the bull market is over right this minute, and that everyone should run to the exits. The stock market is not something a retail investor should use to make a quick buck, or try to time. Speculation is best left to the professionals who do that for a living and typically have the bottles of antacid to prove it.

Investing in stocks for most people is best done with a very long view and as part of a diversified portfolio that holds things like bonds and cash as well. The long-term investor knows there will be ups and downs, expects them, and is prepared to weather those storms. The long-term investor owns stocks for decades, investing, and reinvesting, regardless of market prices. The savvy long term investor will want to buy stocks when the market is low, and the headlines begin to comment on the death of stocks. This is when our burned party guest is swearing off stocks, “forever this time.”

A famous Warren Buffet quote summarizes this mentality perfectly: “I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep.”

If you own a diversified portfolio and rebalance on a regular basis, you are engaging in this very practice, you will be selling stocks as they rise and buying stocks as they fall. Yes, there will be short term losses on paper from time to time, but history speaks for itself, and the disciplined long-term investor typically succeeds with the right tools.

With this kind of approach, you’ll never be late to the party. You’ll enjoy the punch, take a spin on the dance floor, make it home safely, and not spend any time worrying about the stock market.

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