By In the decades that I have been an investment advisor, a distinct investor pattern has become obvious to me. I have given these stages my own names to describe the typical emotions felt by investors. Unlike similar descriptions that describe this cycle, I start my sequence at the upper part of the cycle.
STAGE I. Exuberance.
Before Alan Greenspan called the action in 1999 "Irrational Exuberance," I called this stage "Greed." It is a proper beginning because it is where most of the new money enters the market. Valuations are high, prices have been moving up, cocktail talk is about how much money investors are making and people are afraid of being left behind. People are buying who have not invested in a long time.
STAGE II. Fully Invested.
This stage could also be called "Ultra Bullish" because everyone in sight is in the market. Only the most cynical would not be participating in this phase. It is the tops.
STAGE III. Apathy
This is the most dangerous of all. Prices have begun to fall; believers are still looking for prices to go higher; fully invested participants have few resources outside their investments and much of the market news is still good.
STAGE IV. Disgust
This is the too-late-to-sell stage – at least in the minds of the newer market participants. Some will even tell us that they cannot afford to sell now. Anytime one does not have liquidity, it is time to sell something. Unfortunately, this is the stage where prices continue to drift and various sellers throw in the towel.
STAGE V. Sold Out
This is where most of the money that came in during Stage I has come out. The late stage buyers are out. They swear never to be in this market again. The market is about to turn.
STAGE VI. Apathy, take 2.
Prices are moving again. The market seems to be drifting upward without anyone caring and certainly no one we know tells us that they are buying. The price changes are not making front page news.
STAGE I. Exuberance ... again
And here come the buyers again and even the never-again buyers are back.
You will notice that I did not say "stock" market because these cycles happen in all markets – stocks, real estate, gold, and of course, even oil. Each market has its own cycle. I bring this up because we have been through a minor correction in the stock market. And, yes, it has been minor – just over seven per cent on the S&P Index. Someone figured out that we have an average of 2.3 declines of six percent or more per year and one of ten percent or more every 15 months in the stock market. Declines of 20 percent or more occur every five and one half years. Oh, and the big ones of 40 percent or more – they happen about every 35 years. The stages mentioned above happen in minor and in major cycles and in all the markets.
It has always been a strange quirk of the investing public that they become more afraid the lower the prices fall in a given market. Recognizing the above patterns might help some investors change their reactions to the typical cycle. They might be more inclined to appreciate lower prices and be buyers at the lower part of the cycle.
L. Dean McGowan is Senior V. P. UBS Financial Services, 5080 Spectrum Dr. Ste 1000w, Addison Tx 75001; 972-450-4324; toll free from Mexico 001-800-010-1323; From the U.S. & Canada 1-800-288-1515. McGowan will be in Guadalajara on July 13 and 14 at the Holiday Inn Select. He will be in Ajijic July 15 through the 21 at the Nueva Posada (766-1444). To make an appointment, call his office. There will be an investment workshop in Ajijic at the Nueva Posada on Monday, July 17 from 10 -11:30 a.m. The public is invited.
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