Many investors tend to miss long-term bull markets (that consistently rise) and observe in hindsight that they were in “too little, too late”.
These seven golden rules – if applied – will let you insulate your wealth against any major increases in the future.
An endless back-and-forth in markets has been taking place over the past ten years. CNBC has reported year after year that the “easy money has been made” in markets, and yet the bull market has raged on all the same.
In stock markets, valuations (price an asset would fetch in the marketplace) have been quoted at lofty levels, pundits have spotted irrational exuberance in markets, and yet new stocks have moved on and not looked back.
Over these years, many private investors have re revealed how they were reluctant to chase the bull market early on, especially after repeatedly hearing that they had missed out on most of the ‘easy money’ in the first place.
Memories of hurtful experiences during the ‘tech bubble’ at the turn of the century were still too close to the surface to allow investors to re-enter the space. There is no point in highlighting that most of the new market leading stocks of the past decade were not even quoted on a stock exchange in 1999.
JOMO (the Joy Of Missing Out):
After all the relentless efforts of trying to put ‘cash to work’, many investors seemingly do not want to be part of the bull market. So to add value to this sizeable group of investors, the following is suggested: instead of following this half-hearted approach of being in and out of the market and having a bit of this and a bit of that but not really a significant exposure to booming assets, it is time for a bolder approach.
In other words, enjoy missing out on the bull market entirely, i.e. embrace the ‘Joy Of Missing Out’ (JOMO). To raise the bar even further, here are ways of not only missing out on the current bull market but also on any bull markets in the future.
First risks first: Gut feeling – distinguish between risk and uncertainty
Before we start to approach this ambitious goal in a systematic way, it is good to agree on a toolbox to get us there. By ‘toolbox’, mean the way in which we approach a future that is risky and uncertain.
A very helpful method can be found in the proposal of Gerd Gigerenzer, a German psychologist and Director Emeritus of the Max Planck Institute for Human Development.
How Professor Gigerenzer differentiates between risk and uncertainty? The concepts of risk and uncertainty are more than a hundred years old but not fully understood or adapted in many sectors. In a nutshell, Professor Gigerenzer considers risks as situations where probabilities are known and therefore statistically manageable, such as lotteries, weather, and demographics. In such cases, Big Data and sophisticated decision modelling make a lot of sense.
Big data is a field that treats ways to analyse, systematically extract information from, or otherwise deal with data sets that are too large or complex to be dealt with by traditional data-processing application software.
In contrast, uncertainty describes those situations where probabilities are not known (or are constantly shifting). Here, the best approach is to work with heuristics, i.e. simple approaches that worked in the past (rules of thumb), and adapt them continuously.
The blueprint for financial markets
In the financial community, the belief still seems to exist that markets are stable in terms of probabilities. And indeed, maybe one day a super- or quantum-computer will come up with the answer to everything in financial markets. For now, we will proceed with proven rules of thumb.
Seven Golden Rules:
Rule #1: Do everything on your own – don't delegate
This is extremely important, as bringing an investment specialist into the equation might add value to your investing.
You would, of course, involve a professional doctor if this were a matter of health – and not necessarily a generalist, but an ophthalmologist, an orthopaedist, or a cardiologist, depending on the ailment.
But when it comes to wealth, most individuals prefer to do everything on their own. Whether it is oil, semiconductors, China, copper, emerging market bonds, or the Nifty 50 stock market index in India, the ‘sell’ button on the e-banking app treats them all the same.
If anyone challenges your behaviour as being irrational compared to your willingness to call in doctors, lawyers, or plumbers, your best answer is: “Investment managers often underperform the benchmark and only add costs.”
Rule #2: Always hold excessive cash positions
‘Cash is king’ is a favoured saying of the JOMO tribe, for there is always a reason to be cautious.
It is a similar tactic to believing that staying in bed every morning is the safest way to avoid the dangerous world in which we live. Of course, a quarter of all personal accidents happen at home. Furthermore, if you stay in bed for a prolonged period, your probability of developing health issues soon soars – due to the lack of exercise.
The same holds true for holding on to cash for too long: it makes your purchasing power run like sand through your fingers.
Rule #3: ‘Be in’ or ‘be out’ of the market
“Is it still time to chase the market?” or “Is this an entry opportunity?” are two of the most commonly asked questions.
Timing markets is one of the capabilities of money managers. The main reason may be that markets tend not to fall any further if all the sellers have unloaded their positions, regardless of how dismal the prospects may still be.
The reverse is true for bull markets, when everybody is fully loaded with the booming asset and even the best news flow will not lift prices further. So trying to time the market yourself is another useful tool in the quest for missing out on big, long-term trends, especially if you include the rules below.
Rule #4: If you have an investment plan, don’t stick to it
Planning provides discipline, and a plan gives you guidance in times of turbulence. That is also the reason why investment professionals stick to stock market benchmarks or indices.
It gives them the certainty that they are sticking to the plan, which is, for example, something like being 100 per cent invested in a stock index or running a 60/40 portfolio (which traditionally invests 60 per cent in the index and the rest in bonds).
First of all, such a plan allows investment professionals to stay the course in times of doubt and uncertainty. Second, it gives them the opportunity to reap the benefits of long-term risk premia (i.e. payments you receive for investing in the long run).
And third, investment managers can be measured against benchmarks in terms of what value they have added. And yes, they underperform on average, as they represent plus/minus the overall market. So the benchmark minus average management fees is the expected return.
Looking at the reasons outlined above, you may still be tempted to have an investment plan. But do not worry. If you insist on a plan all the same, there is a loophole, of course: just do not stick to it.
Rule #5: Always wait for more evidence
There are endless discussions in this regard. Of course, “Why now? Let us wait for more evidence” is another very helpful approach for missing bull markets, since by the time the evidence comes in and is tried and tested, financial markets will have already priced it in long beforehand.
So this feels a bit like the tortoise and the hare tale, where the tortoise is already there when the hare rushes in panting. Waiting for more evidence is an absolute evergreen in the world of JOMO, especially as you stay invested.
Rule #6: Sell the winners – stick to the losers
This is a great rule to apply at a single-investment level.
Just think of the early 2000s, when mining stocks were recovering after a 20-year bear market. The best way to miss out on the subsequent multi-year bull market was to sell these stocks after a minor rebound while holding onto the information technology stocks that were overpriced at the time and kept ticking down month after month.
The same applies in the reverse for sticking to gold while taking profits on the US stock benchmark S&P 500 during the 1980s.
Rule #7: Futility of bargain hunting, 'bottom fishing', 'averaging down'
A helpful add-on to the previous rule: in case you are not holding all the losers in your portfolio yet, this is your best way of getting there.
By chasing the most oversold stocks, you are quite likely to hit the area that will not go anywhere in the long run.
Bottom fishing simply refers to the strategy of buying undervalued assets with the aim to gain from the investment when prices normalise. It is a value investing technique that works on the assumption that the low price of a particular stock is temporary and would rise in the long-term.
'Fantastic' bull markets - and how to spot them
“How do I know we are in a bull market in the first place?” Some of the rules outlined above about holding excessive cash, selling into strength, and buying the dips may make perfect sense in non-trending markets or even in bear markets.
Moreover, it is quite surprising how difficult it actually is to spot a bull market while it is alive and kicking. It goes hand-in-hand with being able to spot a good marriage or a great professional career – you may only know for sure in hindsight. Then again, can it really be that difficult?
As opposed to marriages and careers, bull markets can be measured in dollars, euros, francs, or yuans when they are underway. In addition, as suggested by Gigerenzer, simple rules may make all the difference.
One simple rule for spotting a current bull market – Finding the ‘golden cross’
A rule of thumb for how to tell the difference between a long-term upward market trend and a non-trending market is to look at simple trend signals. One of the best-known trend pattern is the ‘golden cross’.
How to locate the ‘golden cross’ in a stock’s price chart? By plotting the 50-day ‘moving average’ against the 200-day moving average in a stock market chart, you can identify longer-term price patterns.
If the 50-day moving average is above the 200-day moving average, it shows you that the asset price has been trading higher in the past two months (or 50 trading days) than in the past 9–10 months (roughly 200 days).
The place where the two lines intersect is the cross – a golden one if the 50-day average crosses the longer-dated average on the upside (acceleration upward) but a death cross if it crosses to the downside (deceleration).