Be careful in Bull Market !

Investors should be more careful in any bull market than in a bear market. It may look very easy to invest in the trending market and Buffett once warned about the bull market citing the fairytale of Cinderella to illustrate the perils of a bull market.

Here is what he wrote,

“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behaviour akin to that of Cinderella at the ball. They know that overstaying the festivities - that is, continuing to speculate on companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

The problem is that investors get buy calls from everyone. Companies like Subex, HDIL, and Yes bank will be bought by retail investors. The tragedy of a bull market is that the dirty companies will dance and fly higher - but investors think that the trend will continue forever. They don’t realize the fact that every bull market is followed by a bear market. When the climate changes the scene will be different. All dirty stocks will keep hitting lower circuits with higher volumes. It may take several decades to get back the purchase price. Study the long-term chart of DLF and check how it has fallen from 1200 to sub 100. Maybe you will learn a lesson about how a bear market can easily break the backbone of a bull market. 

How to avoid the pitfall? The best part is to buy only leadership stocks with reasonable valuations and most importantly avoid all hot tips. Peter Lynch in one up on Wall Street cautioned investors to avoid hot stocks in hot industries. But retail investors always are attracted to it.  If you want your hard-earned money to grow just buy index funds. It’s the best option for any investor.