“It’s a bull market, you know!”
Those are probably the most important six words to my personal investment philosophy. It comes from Reminiscences of a Stock Operator, one of the best books on the psychology that drives investors and traders.
It was one of the first finance books I ever read. It covers the successes and failures of legendary trader Jesse Livermore, whose name is disguised in the narrative.
In the book, a grizzled trader – dubbed “Old Turkey” by his juniors – uttered those words to answer a young trader’s question. The younger brokers were always spinning complicated stories and asking his advice on whether they should buy or sell.
The simplicity of his reply might make him seem thoughtless… But in reality, the simplicity is its brilliance. And as I’ll explain, we can apply this quote perfectly to today’s market…
When stocks are going up, they tend to keep going up. So if stocks are rising, you don’t have to complicate things. You don’t have to overanalyze. Instead, you buy.
Importantly, this principle holds up when you run the numbers. Rising stocks tend to keep rising – regardless of investors’ emotions or future concerns.
The easiest – and best – way to take advantage of this is to stick with the uptrend.
To prove it, let’s build a simple investment system: We’ll buy stocks when they’re going up. And we’ll sell them when they’re going down.
To measure “going up” and “going down,” we’ll use a moving average. Almost any moving average will do – but let’s look at the 10-month moving average.
This is just the average of the last 10 monthly closing prices for the S&P 500 Index. As a rule, stocks are “going up” when they’re above this line. Take a look…
You don’t have to be a brilliant market technician to use a moving average. We can quickly see how stocks fare in these “going up” and “going down” phases. And it proves the value of sticking with the uptrend.
The S&P 500 returned 8.3% per year over the past three decades. But if you only owned the index when it was going up – when it was above the 10-month moving average – that annualized return increased to 11%.
That’s solid outperformance. Plus, stocks were going up 75% of the time. After all, bull markets are much more common than bear markets.
What’s just as interesting, though, is what happens when stocks are going down. That occurs just 25% of the time. And stocks return only 0.7% per year in those cases.
In short, returns nearly dry up when the market is below this moving average… And they increase handily when prices are moving higher.
That’s exactly where we are today. We’re well above the 10-month moving average.
Investors can come up with any number of reasons to sell today… from geopolitical tensions to the upcoming election, to rising valuations. Even new all-time highs can make folks panic.
But none of that really matters, for one simple reason…
Stocks are going up. That means they’ll likely keep going up. Or, as Old Turkey would say… “It’s a bull market, you know!”
Your job is to stop fighting it and invest accordingly.
Good investing,
Brett Eversole
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Source: Daily Wealth