Putting It All Together–The Market Cycle

The positives compound in a bull market or bubble.

Prices are affected primarily by the fundamentals and by psychology.

If the market were a disciplined calculator of value based exclusively on company fundamentals, the price of a security wouldn’t fluctuate much more than the issuer’s current earnings and the outlook for earnings in the future.

Three stages of a bull market:

1. A few forward-looking people begin to believe things will get better.
2. Most investors realize improvement is taking place.
3. Everyone concludes things will get better forever.

Three stages of a bear market:

1. A few thoughtful investors recognize that, despite the prevailing bullishness, things won’t always be rosy.
2. Most investors realize things are deteriorating.
3. Everyone is convinced things can only get worse.

In the darkest times, it takes analytical ability, objectivity, resolve, and imagination to think things will ever get better. The few people who possess those qualities can make unusual profits with low risk.

What the wise man does in the beginning, the fool does in the end. This statement tells you 80% of what you have to know about market cycles and their impact.

• First the innovator
• Then the imitator
• Last the idiot (that jumps in or out at the end of a cycle when prices are at extremes)