In a recent blog entry I discussed the importance of researching a stock before you buy it. Today I talk about researching the market before you enter it so that you can better define its personality — and yours.
Please note that I’m not suggesting that one market — “bear” or “bull” — is better than another or that we should enter a market at any particular time. Popular notion states that any time is the right time to invest in the stock market.
It’s just that which stocks we buy or how we buy those stocks might change depending on the kind of market it is at any one time.
I’m suggesting that whenever you decide to begin investing in the stock market, you should find out what kind of market it currently is, where it is in that market cycle, and what we can expect from it in the future.
A Bull Market
Bull markets — that is the stock market is headed up — are good things. They generally occur when the economy is growing, jobs are plentiful, often when there’s no war, and life is less stressed.
While I’ve made most of my wealth during bull markets — think 1990s — a bull market can become overzealous and change quickly.
An example of this is when the Tech Bubble burst in March 2001. Stocks seemed headed up forever — until suddenly stock prices quickly came tumbling down.
A Bear Market
A bear market is just the opposite. The economy is not in good shape and may even be in recession, stock prices are falling, and the outlook is dismal.
A recent of example of this is in 2008 during the financial crisis when our economy was as close to being depressed as in the 1930s.
However, it was at the end of a bear market in the late 1980s, that I accumulated much of my wealth. Stock prices were depressed so I was able to buy stocks when their prices were low — thus benefitting from the bull market of the 1990s.
Bull and Bear Investors
Individual investors can be Bulls or Bears, too.
Bulls — like me — believe stocks will always go up in the long run. While even I realize there may be times when stocks go down — after all whatever goes up must come down — I believe if I buy a good stock, it will go up.
I guess I believe that whatever goes down must go up. Rightly or wrongly, that’s been one of my guiding principles of my investing career.
Bears, on the other hand have a more pessimistic or cautionary view of the stock market, choosing to invest their time in money in the belief that it’s more profitable to bet the market will go down. The stocks that Bears invest in or the tools they use to invest may be very different from the Bulls.
Neither type of investor is right or wrong — but being a Bear or a Bull investor can influence what someone will do during a Bull or a Bear market. The possibilities are way beyond this one blog entry — but I will talk about this more later.