The bear stock market has done its job. This removed the excess bullishness, and it revalued the shares in line with reality. Like previous major selloffs, these resets were driven by key fundamental and forecast changes. So…
Don’t expect the next bull market to be anything like the previous one
Times, circumstances and attitudes are changing. However, most investors and many investment professionals will be slow to let go of the past. Their comfort in living with what they know hinders their adjustment until they are convinced of a new, better approach. Naturally, that means they’ll need to see the proof: improved performance and widespread popularity.
The pattern will be familiar:
- Amid high negativity and skepticism, some stocks start rallying
- The negativity eases and buys returns as the stock market stops falling and builds a foundation
- The stock market begins to rise, creating relief and a desire to look ahead
- The rise of the stock market becomes apparent, increasing investor interest and creating even limited bullish momentum.
- The new bull market is mostly accepted, and there is now a realization that some parts of the stock market have outperformed other, more familiar sectors.
So, today’s strategy is clear:
Start aiming for new stock ideas that may be outperformers. Know that they and the logic behind them will be different: new, exciting and fun.
very. What will emerge will be a dramatically different “theme” involving the winning stocks. Importantly, they will not resemble past, familiar subjects.
Why is there always such a dramatic change? human nature:
- In a bull market, the theme emerges as a descriptor of both logic and winning strategy.
- In their heyday, subjects become the ultimate approach to stock investing
- At their peak of popularity, themes produced extreme heights of valuation and return expectations.
- When some concerns are first noticed they slip top ratings
- When concerns begin to dampen expectations, the slip becomes a slide, potentially indicating the shape of a bear market.
- As concerns become more widespread and certain, a bear market occurs, culminating in a flood of negativity that undermines and discredits those bull market themes and beliefs.
Key Question: How to Invest in the Next Bull Market Theme?
Realize that the new bull market is not predicted in some magic Wall Street planning book. It will evolve with circumstances, actions and developments. So, the answer is to hitch a ride on Wall Street’s wagon. and that means…
Invest using active managers, pursuing capital appreciation. Diversify between value, growth and eclectic management styles. Also, diversify the size of the company (better yet, find funds that aren’t constrained by size). Avoid the largest funds – they are too cumbersome to make timely changes, plus they stay close to the overall allocation of the stock market to maintain their performance.
An example: my fund options
I believe that winning in the next bull market will require strong, in-depth research that backs experienced portfolio managers. Therefore, I have chosen the following four stock funds (three at Vanguard and one at Fidelity).
Three Vanguard Funds are managed by independent investment management firms selected by investment professionals at Vanguard. This multi-management style is practiced by major institutional funds and was the cornerstone of my career. This allows particular managers to outperform while controlling overall risk by diversifying between different management styles.
Here are the three Vanguard Funds and the number of investment firms selected to manage each (each linked to the Vanguard Funds page):
- Vanguard Windsor Fund (Value Funds): Two Investment Management Firms
- Vanguard Growth and Income Fund (growth and value mix): three investment management firms
- Vanguard Explorer Fund (Specialty Growth Fund): Five Investment Management Firms
The Fidelity Fund is managed entirely by Fidelity, which has a history of successfully identifying new growth topics. This fund focuses on top picks and the small size of the fund allows it to be versatile.
Fidelity Focused Stocks (Specialty Growth Fund):
- Holdings: 40 companies
- Fund size: $3.2 billion
- “Active Shares” (the scale for index funds ranges from 0% to 100% for absolute deviation from the S&P 500): 66%
Bottom Line: Be Positive, Think Different and Act Now
The major challenge of investing is tackling a new, alternate universe that is unlike any of its predecessors. With a tectonic shift, as in the present, investor confidence in the ultimate set of “basic truths” is undone. In their place are uncertainties indicating the need for caution.
However, we should welcome the new focus on risk amidst bleak forecasts. This mindset keeps valuations under control and hence makes potential returns more attractive.
So, be happy that this is the beginning of something new and everyone is faced with the same unknown. now, All We need to invest in a way that allows us to capture the upcoming new excitement well before it becomes popular.
Credit: www.forbes.com /