The stock market is finally moving at its full speed towards an epic bubble. The signs are obvious: extreme valuation, explosive price increases, and investor’s hysterical behaviors to chase returns. But the challenge for any investor is not to spot the bubble, but rather to avoid the pains associated with a bubble. There are two common painful events that occur in investing that are associated with a bubble.

  • Pain #1 – You “chase” the bubble only to realize later that you are the “sucker”.
  • Pain #2 – You “spot” the bubble only to see the stock prices going up day-by-day and you look like a “fool”.

It is quite easy to call the market a bubble. But, it is a much harder call not to be a “participant” in it. Because the bubble can stay longer than you stay insane.

Through my many years of providing investment advisory services, I have found that people are surprisingly not so concerned when they lose money because they think they can hold a losing investment until it “breaks-even”. But they have a lot of regrets when they feel that they have missed out on something. FOMO (fear of missing out) is something that has a far greater impact on an investor’s behavior than fear itself when it comes to investing.

We know all bubbles will eventually burst, we just don’t know when, and we often don’t believe we will be the last dancer. Every year, there are “gurus” calling for the market crash, but a slow-burning bull market like this can easily outlast the patience of most investors.

If you were not investing after the historical market crash last year followed by the spread of the global pandemic, you probably not only feel anxiety but envy as well. If you gave up investing since the 2008 Global Financial Crisis, you will likely be buying right at the top of the next crisis too.

For another group of investors, if you just started thinking about investing this year, you probably have no clue about the bloodshed that happened in March last year. It is nearly impossible for you to understand what a stock market crash feels like.

In my latest investment letter to my clients, I quote Publilius Syrus – “Anyone can hold the helm when the sea is calm.” – I am writing this article to remind you not to be carried away by the wave of exuberance in the stock markets now.

Markets never forget, but people do

If you were not investing in 2020 and just woke up in 2021 and looked at major stock indices like the S&P 500 chart below, you would probably conclude that 2020 was just another year of investing.

A “boring” year of S&P 500 in 2020 if you ignore the second quarter of the year.

But for those who have gone through the roller coaster in 2020, you know what I am talking about. It is probably an experience that you wish you wouldn’t have to go through again.

It seems as if the stock market has erased the memory of the global pandemic with 2 million covid-19 deaths, a “financial massacre” with a negative oil price, a year with the most number of “circuit breakers” (a mechanic for the stock exchange to stop the panic selling) in all financial history.

In addition, many businesses were forced to close, from Virgin Airlines to Hertz, from JC Penny to Robinson.  Many people lost their jobs while massive government stimulus packages were used to support the economy. Unlimited money was printed to “save the economy” at the expense of the savings of retirees.

Yet the highlight of the past year was not just about doom. It was also about a new breed of rich who hit the jackpot. Bitcoin helped some people’s overnight millionaire dream become true. Elon Musk became the world’s richest man because Tesla’s share price appreciated 1100% from $80 to $880!

A stock market cycle completed in a year

John Templeton said, “Bull markets are born on PESSIMISM, grow on SKEPTICISM, mature on OPTIMISM and die on EUPHORIA.” A typical market cycle is spread between 5 years to 10 years, but it seems to me that, we have completed the entire cycle in less than a year:

  • Matured on optimism (January 2020)
  • Died on euphoria (March 2020)
  • Was Born on pessimism (April 2020)
  • Grew on skepticism (May to November 2020)
  • Matured on optimism again (December 2020)

Are we moving to an even higher Euphoria that we haven’t seen in 20 years?

Back to the future

As mentioned earlier, I have a habit of documenting my investment thoughts. I have mixed feelings when I look back over my investment notes from the past year.

I remember vividly the days and nights in March and April 2020, when I was telling my clients to refrain from panic selling; when I was trying to explain to them that REITs were no safer than stocks, and growth would outperform income. It was not an easy conversation.

When I look back, my April 2020’s investor’s letter was the longest that I have ever written. And I want to share with you what I wrote then. When you read it, look at the chart below, and imagine you are living in April 2020, when the global market has just gone through a crash at an unprecedented speed and nobody knew what was going to happen next.

I know this is too much to ask if you have never personally experienced it, or you may have forgotten about it.

But sometime in the future, you will experience this again. It will be too late for you to think about it then. I want to share this as a case study so you are prepared before the stock market bubble bursts, although you can never prepare enough.

Additional Reading: Ivan’s Reflection in April 2020.

If you understand the article correctly, this article is not to tell you to avoid a bubble, but to stay sober. A stock market bubble is nothing to be scared of if you know how to handle it.

I don’t know when and how the next stock market crash will happen, but it will happen. And here we are again, waiting for the last dance and, eventually, for the music to stop.

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About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

  • For those who have reaped big returns, it’s a good time to build up cash (at least 20% of your portfolio will be nice) as well as emergency fund (12-24 months of expenses). Take advantage of the huge price appreciation to convert some of your riskier assets into cash.

    Nobody can predict accurately when the next crash or bear will start. But you can be prepared. Having sufficient amounts of cash helps with mental preparedness that will prevent you from doing dumb things when you your portfolio is covered in blood.

    • Hi Sinkie, agree and I think this should apply even if you didn’t reaped big. Whether you made money or not in the past should be independent from your investment decisions today.

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