Sunday, November 24, 2013

Summer Storms - Chasing stocks on the rise is a recipe for disaster

These days we’re clearly in a bull market. Yes there is room for a correction somewhere after or around April - my guess. But probably another good stock market year lies ahead. I think we just entered the last stage of the bear-bull market cycle where people start to throw away all caution.
They may say things like: “ Yes I am a fundamentals guy, but look at Facebook; look at Amazon. I don’t understand why, but these stocks keep on going up while my dividend stocks linger. I better switch to buying these momentum stocks.”
This is the fear of ‘losing out’; ‘standing besides the sidelines while others make big p[profits’. Just like in your neighbourhood, many investors want to keep up with the Joneses. But  a lot of the Joneses hold only hot air and once their balloons are pricked, the air runs out and only an empty bag remains.  That leased Mercedes, that fancy house, the vacations in Mexico were not paid from amassed wealth but from the hot air of consumer credit. The moment the Joneses’ are hit by a snag, like a lost job, their Mercedes, their fancy house and the boat on the lake are gone and the only thing left is a financial mess.

The same with you trying to copy the profits bragged about by your friends who all of a sudden turn out to be stock market ‘experts’ (weren’t they a year a ago all quietly suffering from their devastating 2008 losses – claiming to never again invest in stocks?). You should not let their hot-air stories tempt you to invest in the speculative garbage that shoots up (for a few moments) during the exuberance of this final stock market stage.  Contrary to what you will read over the coming months, risk is rising along with the rising stock market.  We don’t know how far these markets will rise or for how long – but we are in the latter stages of the bull.
Remember, the canary in the coal mine is the revival of the commodity heavy Toronto and Vancouver markets. We may still get one hell of a party, but now is the time to control your stock buying and get ready to take profits – building cash for the next bear.
BTW, don’t burn all that cash in the first moments of that bear market – that is one of my common mistakes: buying too early in the bear market. Fortunately, that is still quite a bit away.
Stick to buying good companies at good prices. When you don’t find such companies then stop buying and don’t chase rising stocks that you don’t understand.  Yes, you may not be the center of the party talk, but neither will you stand naked on the beach when the tide falls.  During the dark days of a bear market we’re looking for light at the end of the tunnel, during the summer of a bull market, we’re looking for the early signs of storm.

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