Nobody Rings a Bell at Market Tops…or Bottoms

Anyone who invests in stocks understands that volatility is part of the game. Stocks go up in value and they also go down.

Now bond investors are getting a taste of that reality, though it has taken decades to get to this moment in the fixed-income market.

The result has been an excruciating few months for investors all around, as stocks have taken a hit and bonds have fallen at the same time.

The bad news leads to the obvious question: When will it be over?

It will end, if market history is any guide. Selling continues until it stops, and it stops because buyers see bargains they can’t ignore.

The problem, as the adage among traders goes, is knowing exactly when. Nobody rings a bell at the market tops, or bottoms.

Expecting some kind of obvious signal to buy or sell is the problem with speculative investing. It relies on the largely mistaken assumption that somebody knows when a trend is exhausted and must reverse course.

Nobody knows. So what can you know?

You can know a lot, actually. For one, it’s a fact that bear markets last months while bull markets last years.

Patient hands

If you look at some of the worst bear markets in history you will find that the longest-lasting bear run was from March 1937 to April 1942, a 61-month bear that resulted from the Great Depression.

Nevertheless, in modern times bear markets tend to last about nine months while the typical bull run is 2.7 years in length. That’s just averages. The bull market that started in March 2009 ran until March 2020, when the pandemic began.

Another fact is that stock valuations are always a two-way street. If there are sellers there must be, by definition, buyers.

Warren Buffett, the iconic billionaire investor, put it this way: “The stock market is a device for transferring money from the impatient to the patient.”

Essentially, investors who seek a quick buck are usually punished, while those who wait for valuations to be fair often can pick up shares at fire-sale prices.

Those patient buyers are active when it counts, quietly taking shares from those who simply cannot wait and want out.

These two facts are the fulcrum upon which prudent portfolio investing rests.

A long term investor needs to be patient of course, but he or she does not need to be right about the direction of stocks and bonds at any given moment.

Rather, the long-term investor should own both (as well as other asset types) and use rebalancing and cash savings to purchase shares when they are suddenly made cheap.

In time, bulls get exhausted and collapse. In time, bears get worn out and hibernate.

You don’t need to know when tops and bottoms are here, just be patient and ready to invest appropriately as prices eventually begin to favor your own investment goals.

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