In an earlier post I mentioned that a lot of markets could be in an economic bubble. So from the advice of an expert, here’s how you can invest in a bubble profitably, and safely.
How to Invest in the Beginning of a Bubble.
All bubbles begin looking like a normal bull market. There is reasonable buying and the market is increasing for good reasons, such as a the start of a great period of economic prosperity (e.g. 1982-2000). One must remember that the entire stage of a bubble is known as a secular bull market. A secular bull market can generally be defined as a really bull market, which usually lasts 16-19 years. So how does one know that a secular bull market is under way? Well, you look at the fundamentals. Before a secular bull market comes the secular bear market. Before a secular bull market can commence, all the fundamentals in the economy need to be prepared and stabilized. Once all the key fundamentals are built well (e.g. low inflation, uncompetitive companies are bankrupt, etc), then a secular bull market can start. In the early stages of any bubble (e.g. 1/3 into a secular bull market), there is reasonable buying. Economic conditions are improving, mom and pop are seeing wage increases, inflation is relatively low, etc. This is the time to invest in the bubble.
Many people are afraid of investing in the beginning of a great bull market because they worry if the markets will fall back. There are 2 easy (or not so easy) ways to solve this problem. 1 – History repeats itself. Look for the pattern of a 17 year secular bear market. 2 – Use technical analysis. But this can be pretty challenging. Remember, invest in the beginning of a bubble can prove to be extremely profitable later on. I recommend you invest your entire portfolio in the market at the beginning of the bubble. You’re down side is limited.
How to Invest in the Middle of a Bubble.
The middle of a bull market is when the bubble starts becoming evident. Things are getting pretty hot, but the markets aren’t getting out of control. The upward movement in the markets are still reasonably justified, since people aren’t yet all falling over themselves to invest in the bubble. This is the stage where all the mutual and hedge fund managers start noticing, the the markets start making some front page headlines. The markets begin increasing at an even faster pace, and people start noticing. My advice? Wait and hold onto your position.
How to Invest in the End of a Bubble.
The end of a bubble can be signaled by several things. The “this time is different” is a huge sign that the investment bubble is in it’s final stages. The so called experts start make up total BS about how the markets are going up Up UP! Mom and pop starts investing. In the final stages of a bubble, the only people left are the speculators. There is no longer any underlying fundamental driving the markets up; just pure speculation. This stage of the bubble is also the most dangerous, because no one knows how much higher or longer the markets can go up.
This is the tricky part. I mentioned above that you should wait and hold onto your position, but for how long? A true bull market must surpass its old highs. The bubble usually tests its old highs at the end of the bubble. So once new highs are established, here’s how you can get out of your investment. It’s actually very simple. For every 10% that the markets surpass it’s old highs, you sell 10% of your portfolio. But keep 1/3 of your money still in the market, that way if the markets further doubles or triples, you’re still catching part of the increase. That way, you won’t be caught off guard when the bubble pops.
But once you’re completely out, don’t get back into the market on the buy side. Countless great investors have gotten out of a bubble, only to see it rise day after day, buy back into the bubble with great agony (out of fear of missing possibly huge profits), and getting killed once the bubble popped.
Warning! Don’t short a bubble. No one knows how much further the bubble can go in the end, so by shorting a bubble, you’re pretty much playing a 1 in 8 chance slot machine.