The Sharemarket

When to Quit the Market
Sharebrokers will always advise their clients that they should never quit investing into the sharemarket and that they should stay in for the long haul – if possible. History has shown over time that the sharemarket easily outperforms other types of investments, so this suggests you should only quit the sharemarket if you are going into it without any type of investment analysis.

If you don’t carry out a proper analysis or evaluation, you are investing totally blind. This means that you are most likely reacting to the market at the wrong time and therefore making wrong decisions.

Many people complain that they always appear to be selling their shares before a strong share price Bull Run and always selling their shares just after a major share price correction. It seems to happen all the time and this is because they are basically gamblers hoping (without any sort of analysis of the market) that they are going to make 'heaps' of money by getting into shares.

The Mob Psychology of the Past
The mob psychology or crowd madness is what you see happening in football stadiums or rock concerts, or even in protest marches. This type of psychology or reaction is very similar to what happens in the sharemarket. A small stampede can mean a minor correction or a minor burn. Major stampedes can mean major corrections or major booms and even major crashes.

There are 2 main lessons to be learned from past booms:

  1. The one about Newton’s law on gravity – what goes up must come down and with the sharemarket, it can happen at the most unexpected times.

  2. The bigger they are the harder they fall – the bigger and longer the bull market continues, with share prices rising for long periods, the bigger the crash.

The 'Big Fool' Theory
This theory so often happens during a euphoric boom period. An investor buys shares at a foolishly high price during the mania of buying that takes place at that time. But then there will be an even bigger fool out there who will pay more for those shares. These investors don’t bother to evaluate the value of the shares they are buying, but work on the basis that a bigger fool will come along and pay even more for the shares.

If you are that type of investor and if you are relying on the 'bigger fool' approach, just remember that it is the fool who is the first to jump ship when there is a slight sign of market trouble. In other words, you could end up being the biggest fool of all.

What is a 'Bull' Market?
A bull market is a prolonged period of rising share prices. The bull is described as representing buyers who by strong demand will force a share price upwards. There are a number of pointers about a bullish market:

  • High growth in the economy.
  • Low inflation.
  • Political stability.
  • Falling interest rate.
  • Growth in company earnings.
  • High takeover activity.
  • A lot of traders.

A bull market is often characterised by high volumes of trading and can last for a number of years. Essentially, as the bull is charging forward the share prices rise for long periods and market activity becomes frenzied towards the end of the bull run. If prices opening near a low and closing near a high and this happens over a regular period of time – this is a strong bull signal.

All markets will last for around about four years without strong price rallying in the latter half of that period. During the latter period, it is time to exercise caution and watch for any strong bearish markets returning.