Bull!
Maggie Mahar |
It sounds deliciously simple, doesn’t it? Invest in stocks for the long term and you’re home free. But equities do not always outperform bonds, and the greater damage to a stock portfolio is always done during the final phase of a bull market. After a bubble has burst, the standard pattern is for the market to trade sideways for years.
The real humdingers were in 1929, 1965 and 2000. The bear markets that followed were long, from 1910 to 1920, 1929 to 1944, from 1965 to 1982. In between you had the mega-bull markets, where you made 10 times your money as we did from 1982 to 2000. This bear cycle that will follow will not play itself overnight. So what if the Dow breaks 10,000? The question is can it stay there, and, if so, for how long?
So what makes investors jump into overvalued markets? What are the psychological and economic forces that drive financial cycles? How does it happen that the very real risks of investing in stocks are forgotten?
Laying out the origins of the tech boom, Mahar – an English professor at Yale before she became a financial journalist – tells the story through the eyes of fund managers, market gurus, analysts, politicians, business journalists, marketers who crunched the numbers and investors who helped create the longest-running bull market in American history. Optimism has some basis. Corporate restructuring may be boosting the bottom line. Inflation might be going down. Long-term interest rates may dwindle.
Still, seasoned investors know a peak when they see one, and the end often comes with warnings with the stock market being spooked easily. There are signs when the market is getting ahead of itself and is overvalued: when demand shoots up, when everyone is talking about stocks, when brokerage firms start advertising on buses, when your local bank-teller starts shoveling brochures for closet-indexing fund-manager-feeding products down your mouth. Share price gains may be excessive when compared to GDP adjusted for inflation. There may be signs of a increasingly jittery and volatile market no longer driven by fundamentals. Greed based on paper value takes over.
Success belongs to the long-term market timer who understands that value is a function of price and knows when to sit tight. I am a firm adherent of value investing, as value is a function of the price you pay when you get in. In that sense, a value investor is a market timer: at the end of a cycle, when the prices are highest, you stop buying.
Mahar also points out that the long-term growth and profits that an economy needs to create the foundation for a healthy stock market can come only from productive capital investments. This is what adds to the wealth of natoins. An economy cannot consume its way out of a slump. It needs to produce. Capital spending for the sake of spending will not help. Until profits revive, there will be no reason for profitable businesses to boost their investments. Until share prices reflect the underlying economic reality, there is no basis for a new bull market to begin.