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Invest Like a Guru by Charlie Tian

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CHAPTER 10Market Cycles and Valuations

Since starting GuruFocus, I have often been asked by friends or users what the stock market will do this week, this month, or this year. I wish I had a better answer than J. P. Morgan's “It will fluctuate.”

To value investors, there is no stock market. There is just a market of stocks in which investors can trade. Stock market moves are the collective movements of individual stocks. Yet, many players are guided by what others do in the market, and their movements form a tide resembling a stock market. Also, as more investors trade market index ETFs and care little about the individual stocks within the ETFs, the stocks tend to move together in one direction. That is probably the stock market that people talk about.

Though I don't know where the market will go in the short term, I have learned a few things about the stock market that I consider important even for value investors who don't pay too much attention to the overall market: (1) over the long term, the stock market always goes up; (2) the stock market has cycles; and (3) higher current market valuation results in lower returns in the future and vice versa. Having a good understanding of these principles can be useful during extreme times.

Over the Long Term, the Market Will Always Go Up

Over the long term, the stock market as a whole always goes up. This seems obvious. But investors tend to forget it when things get scary; it is during these tough times that investors most need ...

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