Whenever a bull market corrects, investors ask themselves: Could this bull run be over?
Today I'll give you one big indication that historically has spelled the end.
Very simply, when the sector that had led the market breaks down, it's a major sign of a long-term top. Do you know which sector led the current bull market higher?
First, a little history about the two previous bull markets...
The bull market from 2002 to 2007 was led by the financial sector. Low interest rates sparked the run-up in real estate and the creation of leveraged investment vehicles that ultimately led to the global credit crisis.
Sure, commodity stocks and utility stocks outperformed the financial sector by two- or threefold, but due to the heavy weighting of financial stocks on the major market averages, that sector had the biggest influence on the bull market.
We saw the sector lose strength and then break down in the first half of 2007. The decline was especially pronounced in the second half of that year.
Tech stocks led the bull market higher in the late 1990s. The majority of small cap stocks began topping out in the first half of 1998 as the heavily weighted technology sector went parabolic. The market charged higher for a while. But as soon as tech stocks cracked in March 2000, that was a clear warning sign of the stock market top.
That brings us to today. The "consumer discretionary" sector is the major S&P sector that led the market higher in 2013
On certain days of the week, supermarkets here in Singapore will slash the price of selected grocery items? You need to be on your toes to take advantage of the offers, though. They can be snapped up quite quickly.
From a retailer's perspective slashing prices can help to shift unwanted items quickly. From a consumer's point of view, it is just a fabulous opportunity to make a small dent in the cost of living. We should shop for common stocks the same way that we buy groceries. If something is on offer and if it is also something that I like and use regularly then I will not hesitate to fill my basket.
Interesting parallels between the way we shop for groceries and the way we should buy stocks for our portfolios. For most people, it can be the same with everything else they buy in life. That is except for when it comes to buying stocks.
When stock prices go down, and you can buy more for your money, people, for some inexplicable reason, don't like them anymore. But when prices happen to be on the rise, it seems that they clamber over each other to grab a piece of the action, at any price.
Time and again, the stock market will present us with wonderful buying opportunities. But time and again, we choose to turn our backs on the market when stocks are selling at a discount.
I suppose it might be because we believe that, somehow, the market is super-efficient. That somehow, the market is all-knowing and that it will correctly incorporated every piece of available information into the price of a stock.
The harsh reality is that the market is not nearly as efficient as you might like to think.
The market can be driven by forces that have very little to do with the available information. Instead it is driven by two even more powerful forces - the forces of fear and greed. When there are more buyers for a particular stock, the price of the stock is likely to rise. When there are more sellers, the price is likely to fall.
The upshot is that the stock market can often be driven by what everyone else just happens to be buying and selling at the time. It is called herd-mentality.
This is where smarter, well-informed investors can steal a march on investors who are driven by emotions. The most important tenets of investing - to buy stocks when they are below their intrinsic value. That is likely to be your best insurance again losing money.
Consequently, buying more of those shares when they are priced below their intrinsic value just seems like a sensible thing to do. It is really no different to buying more of those items that you like when they are on offer at the grocer. You can call it whatever you like - It common-sense investing.
This is bad, so far those CPF members who have risked their savings have not done very well.
Almost half of CPFIS-OA investors (47%) incurred losses on their investments between 2004 and 2013, while 35% obtained net profits equal to or less than the default OA rate of 2.5%.
Only 18% made net profits in excess of the OA interest rate.
If only most of the CPFIS-OA investors just invest in well manage REITs.
Example are: Ascott, Cache, Cambridge, Ascendas REIT, Frasers Centrepoint, Keppel REIT, First REIT, Mappletree Commercial, Mappletree Industrial, Mappletre Logistics, Starhill and Suntec. I believe most of them will have no problem being able to make net profits in excess of the OA interest rate.
A word of cautious for REITs, once the share price increase, yield will reduce. We have to decide at which level to hold on. When the yield is low there is not much incentive to hold on. The other issue is increase in interest rate will affect the profit of the REITs as more REITs leavage on borrowing.
Value investing is the way to go - and it is by no means an easy way. Two principles are key to successful long-term performance.
First is to follow sound principles in the selection of securities. They cannot be related to the stock market action. They have to be related to the fundamentals of the economic development of those assets. Invest in solid companies that made great products.
The second is to have a method of operation that differs from the majority of investors. "If you're not different in the way you think from the majority, you're not going to be better than they are. Group thinking and short-term thinking and stock market action are things a lot of us do, and you can't be successful that way."
Robert Kiyosaki said, "True investors does'nt care market up or down because there are going to make money either way"