Substantial rise in the market: Practical questions and psychological problems confronting the investors

A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer.


But what about the longer-term and wider changes in the stock market? Here practical questions present themselves, and the psychological problems are likely to grow complicated.

A substantial rise in the market is 

• at once a legitimate reason for satisfaction and 
• a cause for prudent concern, 
• but it may also bring a strong temptation toward imprudent action.

Your shares have advanced, good!  You are richer than you were, good!

• But has the price risen too high, and should you think of selling? 
• Or should you kick yourself for not having bought more shares when the level was lower? 
• Or— worst thought of all—should you now give way to the bull-market atmosphere, become infected with the enthusiasm, the overconfidence and the greed of the great public (of which, after all, you are a part), and make larger and dangerous commitments? 

Presented thus in print, the answer to the last question is a self-evident no, but even the intelligent investor is likely to need considerable will power to keep from following the crowd.

It is for these reasons of human nature, even more than by calculation of financial gain or loss, that we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor’s portfolio.

• The chief advantage, perhaps, is that such a formula will give him something to do. 
• As the market advances he will from time to time make sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure. 
• These activities will provide some outlet for his otherwise too-pent-up energies. 
• If he is the right kind of investor he will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd.*

* For today’s investor, the ideal strategy for pursuing this “formula” is rebalancing.

A Rising Tide Lifts All Boats

When the economy is doing well, most companies do well as a result. This is the reasoning behind this old adage. If you ignore rising tides in economies, industries, and sectors, you could miss out on big profits. Missing out on these types of profits can hurt you because trend following is one of the easiest and most reliable investing strategies (as long as you're not the last one that follows).

If you see trends forming early on in any market, and invest in that market, you can make a very nice profit. The important part again, is to do your homework to identify the most credible trends and take advantage of them before anyone else. The earlier you get in on an upward trend, the better off you'll be.

But also be aware of the other adage: "the financial genius in a rising market."

Everyone is a hero in a bull market

Psychologists have identified that it is human nature to attribute our wins to our skill and our losses to our bad luck. Don't fall for this trap.

With trading and investment, luck often parades as skill, especially when a market is doing well. During a bullish run in the stock market you will often meet someone who is very happy with their ability to pick the right stocks, because they have backed one that has performed well.

But in the same way that a rising tide lifts all boats, even the rusty ones, many stocks do well in a bull market, even if they're nothing special. So the profit may have more to do with favourable big picture events at the time, such as a strong economy or falling interest rates, than with anything company specific. This really means that the person was lucky rather than skilful.

Be mindful of the old chestnut that 'everyone is a hero in a bull market'. As prices went higher and higher, they increased their investment sizes, so that when the crash came they had far more money at risk than they would have imagined just a year earlier. It ended badly. Profits tempted them in, and losses forced them out.

Financial genius in a rising market

It is good to have friends who are smart intelligent investors. These people are fun to meet. They share precious personal knowledge and experience. On many occasions, you can coattail on their hardwork profitably. At times, they prevented you from committing an obvious investing mistake.

How to spot these smart intelligent investors? Yes, they maybe of any ages. The younger investor maybe smart, but it does take time to build up an experience. Seek out those in their 50s or older with a good track record. There are many who invest in the market; a record they do have but not that of the truly committed smart intelligent investor.

The truly smart intelligent investors are those with a record of good total return accumulated over MANY years of investing. They are passionate, hardworking and perhaps well-networked. They have a philosophy and strategy. They may even sound boring as they are so predictable. They are not many but not rare. Make friends with them. Rub shoulders with them. There is little to lose and a lot more to gain.

Of course, beware the financial genius in a rising market. As the saying goes, when the tide recedes, many of them are found swimming naked.