Inexperienced investors invariably miss the start of the next bull market. Knowing why beginners are so late to the party is important to learning to be a better investor.
First, let us set the typical scene. The stock market rises steadily for several years. Lots of people become interested in investing in stocks. More and more of them are sucked into buying hot stocks and fight to get an allocation of the latest float. Then it all ends in tears. There is either a crash, when the market falls almost overnight, or there is a prolonged period of falling prices. Some large companies fail. Many financial scandals are uncovered. Governments introduce new laws to try to stop future abuses. Most people retreat from the stock market into safe investments, like fixed interest. Some start investing in property, which is said to never go down.
If we have been investing since some time in the 1990s, we will have been through the full cycle twice. The first part of the cycle is called a bull market, when people lose all sense of perspective and buy stocks willy-nilly until the music stops. Then they are left like those holding the parcel in the old party game. Ironic, isn’t it, that if you buy a number of shares in a company it is colloquially called a parcel?
The second part of the cycle is called a bear market. This is when reality intrudes rather rudely on the fun. ...