Value Investing and Bull Stages

07/30/2014 9:00 am EST


Charles Mizrahi

Editor, Insider Alert

New money continues to pile into stocks. More than $100 billion has been added to stock mutual funds and ETFs over the past year. This is a ten-fold increase to the amount that was added the previous 12 months, observes Charles Mizrahi, editor of Hidden Values Alert.

Market conditions over that time have been ideal for the individual investor. The market environment has been a stock market with low volatility and steady gains...the nirvana of investing.

While individuals have been plowing money into stocks, professionals have been taking money out. Corporate insiders (corporate officers and directors) have been cashing in their stocks as well.

Who’s right? This bull market is currently 64 months old, in bull market years that is pretty old. The average bull market, since 1962, lasts 52 months. This bull market, based on past averages, is living on borrowed time.

Historically, individual investors usually invest at the end of bull markets. Judging by their most recent inflows into stock mutual funds and ETFs, it’s fair to say that they just arrived to the party.

There are basically four stages to a bull market.

Stage 1 occurs when there is little confidence in the stock market and people think the best place to invest is under their mattress. Anything to do with stocks is shunned at best and hated at worst.

Stage 2 happens when stock prices have been rising and even stocks selected by a monkey throwing darts at the stock tables seem to do well.

You know you’re in Stage 3 when you go to a cocktail party and there are more hot tips being passed around than hors d’oeuvres.

In addition, more attention is paid to how to make easy money than to company fundamentals. IPOs that lay dormant for several years now begin flooding the market.

The zeal to deal also starts to gather steam. Merger mania is hot and heavy in boardrooms across America. The wise professionals, the ones who accumulated stocks during Stage 1, begin to unload their shares.

Stage 4 is the one that is most easily recognizable. All wise investors need to do is buy and hold. The fear of missing out is greater than the fear of losing money, and investors buy without regard to price.

Greed is at its highest, while the bull market begins to develop a theme. In the past, bull markets were explained by a new paradigm of technology and the buying power of baby boomers. It really doesn’t matter...themes are invented to explain absurd valuations.

Any decline is seen as a buying opportunity. The coup de grace of the bull market is when the media joins in the frenzy and becomes bullish.

Where are we now? It’s quite obvious we are not in Stage 1 or Stage 2. The easy money has already been made, and stocks have had an amazing ride over the past five years.

It would appear to me that we are passing through Stage 3 and starting to enter Stage 4. I am seeing more novice investors entering the stock market with their retirement accounts...after sitting out the past three or four years.

It’s still too early to say we are in the final stage of this bull market. This final stage could last for some time and end in a big blow off. I do want you to keep the current market environment in mind when investing your wealth.

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