When you first invest in the stock market, you will probably hear about two types of market: the bear and the bull. A bear market is a market that is generally heading down, with negative activity and bad forecasts. The contrasting bull market is the one heading higher, with positive forecasts likely. The natural reaction to have in a negative bear market is not to invest, whereas in a bull market the reaction would be to follow the crowd and pour your money. However, this mentality is paradoxically illogical, and this article will tell you why.
One of the most spectacular bull market booms and collapses in history was the growth of the Dotcom bubble in the late 1990s, followed by its dramatic collapse from March 2000 to October 2002, during which some 5 Trillions of dollars have been taken from the value of stocks and tech stocks. What ostensibly happened in this case was overwhelming speculative sentiment about the potential of the internet, with hundreds of companies thriving with similar business plans and securing investments. Venture capitalists saw the rise in these stocks and were keen to jump into the action quickly, bypassing normal constraints and prudence, while increasing the value of the stocks even further. As more and more people jumped on the technology bandwagon, prices skyrocketed until the bubble finally burst, destroying the value of many people’s investments.
The Dotcom bubble is a classic example of when bull market sentiment is completely washed away. The prices went up, more and more people jumped on the bandwagon, which caused the prices to go up, and then the prices collapsed. When times start to improve and you see other people making their fortunes, it’s easy to be wowed by soaring prices. However, imagine that you invested in NASDAQ around its peak of 5,000 points in March 2000. In almost two weeks you would have risked losing 9% of your investment, whereas in one year you would have seen it. lose its value by about 50%.
What you need to know about bull markets is that it’s hard to know when they will run out of steam. The key is not to go with the flow of the market and invest in times of rising prices. If you were to buy high and then sell when the market starts to fall, you would follow the illogical investment policy of buying high, selling low, and you lose money. Instead of this strategy, looking closely at booming markets and waiting for the moment when they run out of steam and start to fall is a better strategy. When stocks become overvalued, as tech stocks did in the Dotcom bubble, they will inevitably burst, but buying following a collapse could lead to a good deal. Buying during “bear market” periods is therefore a more likely way to find a strategy of buying low, selling high.
If you are looking to invest, the current bear market for stocks is a good time to buy. Warren Buffet, the richest man in the world largely due to his investment strategy, said there has never been a better time to buy US stocks, while in the UK , the FTSE 100 is only worth 60% of what it was at the same time last year. If you want to learn more about investing, take a look at Legal and General.