Take advantage of Market Cycles
DISCLOSURE: THIS POST MAY CONTAIN AFFILIATE LINKS, MEANING I GET A COMMISSION IF YOU DECIDE TO MAKE A PURCHASE THROUGH MY LINKS, AT NO COST TO YOU. PLEASE READ MY DISCLOSURE FOR MORE INFO.
As an investor, it's necessary to simply get used to experiencing market cycles. There will always be bull markets and bear markets, upturns & downturns. The key is finding opportunities for money investments within those cycles. It is easy to feel nervous and uncertain during market downturns, but it's important to remember that these cycles are a natural part of the investing process. Use market cycles to your advantage as a successful investment strategy. Act shrewdly to afford many opportunities to generate true long-term wealth creation.
Identify companies with a durable competitive advantage as the first step. But once that's done, don't just buy in at any price the market dictates. The Market is prone to being volatile since company stocks are traded in high volumes each and every day. Consequently, the next step is to take advantage of investors' emotions and the market's volatility. Recognize buying opportunities within market cycles that will aid in generating a superior return on investment.
Business Sense Investing
The buying opportunity of a company with a durable competitive advantage will take place when the stock is trading at or below a certain price. That price should be dictated by an acceptable return on investment expected. Of course, a Margin of Safety should also be baked into the pricing decision. By doing this, the risk of the unforeseen can certainly be reduced.
Certain repetitive types of conditions provide situations for the best pricing of companies that have a durable competitive advantage. Invariably, the Market overreacts to short-term news. A company's guidance for the current year may disappoint Wall Street expectations. Or some sort of economic news may cause a market sell-off. Such instances tend to underly market cycles and cause a decline in stock prices. The repetition of these events tends to make them identifiable. They may be relevant to the market, an industry, or a specific company. But being on the lookout for these conditions can afford buying opportunities at the right price for solid money investments.
Market Cycle Positioning
Specific Elements that Influence the Market Cycle
- Economic and profit cycles shape the investment environment.
- Investor psychology is prone to overreacting to the developments in the investment environment.
- At times, risk is considered non-existent and benign, and then enormous, inescapable, and lethal at others.
- Market prices reflect only positives and overstate them at one point, then reflect only negatives and ignore the positives at another.
These fundamental elements must be perceived and acted upon accordingly as market information develops and flows. Use the insights garnered to assess where the market is positioned and what it implies for future movements. Then act accordingly as an investor.
Understanding Cycle Positioning
The elements that contribute to a surging market present themselves via valuation metrics such as P/E ratios on stocks, yields on bonds, capitalization ratios on real estate, and cash flow multiples on buyouts. These become extremely high relative to historical norms during market surges. And it is at these times that investments are positioned for low returns. The opposite is true when a market collapses taking investment prices to bargain lows.
Such an investment environment is ideal for obtaining excellent opportunities at discounts.
Bear/Bull Market Cycle
Bear Market: Golden Opportunities
Bona fide bear markets provide the absolute best opportunity for shopping in the Market. While everyone else is panicking, these are actually excellent opportunities to invest money. These opportunities are also readily identifiable because the media will announce that "we are in a bear market." Consequently, there will be declines across the board in the stocks of various companies. Having already identified several companies with durable competitive advantage, their stocks will be ripe for the picking.
As legendary investor, Peter Lynch said: “You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready.”
The secret is to be fearless when others are running for the exit. A bear market is one of the best ways to make money. Have your investment capital already in place and your investment options already lined up. Companies will be selling at a fraction of their long-term worth, and that's the best time to buy. Buying opportunities created by a bear market will ultimately be vindicated with big returns during the bull market that eventually follows. The Fed will lower interest rates to stimulate the economy and make corporate earnings more valuable. This is what causes the start of the bull market where investors will see stock prices rise to provide spectacular results.
During bull markets, we see excessive valuations. P/E ratios that were once in the single digits begin to climb to high double-digits. When the Market begins to suggest that earnings no longer matter and valuations are instead based on sales and revenues, that's a sure sign that we're in an overheated bull market. Even unprofitable businesses see their valuations soar in this type of environment. Unreal expectations for constant growth also become the mainstay. Obviously, such circumstances are unsustainable. Consequently, it's imperative not to get caught up in the Market hype and instead be diligent for the coming burst of the bubble.
As bull markets overheat, the stock market tends to suffer a correction. It goes through a short period of panic selling. Investors get nervous, and nervous investors sell their shares and sit on the sidelines to see what's next. That's essentially what we're seeing right now in today's market, especially as it applies to Tech. Stock market corrections and panics are easy to spot, and they generally offer the safest investment opportunities because the fundamentals of the companies haven't changed. The earnings of the underlying businesses remain intact.
Market corrections create great opportunities to invest money at discount prices. Stock prices drop for reasons having nothing to do with the underlying business economics of the companies themselves. Look for and recognize these. If the fundamentals remain in tact, it may be ideal to invest. If already invested, it may be an ideal time to buy more shares in the company. Just like the bear market, periods of market corrections create one of the best ways to invest money because there is no real business problem for the company to overcome, and there is no real issue with the industry or the economy. Or in many cases, the issue(s) is temporary. Market corrections and overreactions create great investment opportunities.
Avoid speculating on what the Market might do, and remain diligent. Seek to identify the repetitive market cycles and aim to leverage opportunities within those cycles for money investment in companies with durable competitive advantage. These opportunities are best had during bear markets and market corrections. Of course, be sure to focus on price relative to value and bake in a margin of safety before making any investment decision regardless of which market cycle may be present. But the short-sighted stock market generally creates excellent buying opportunities again and again....and again.
The information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions. I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.