You’ve heard the old saying, ‘The more things change, the more they stay the same.’
That’s true of the financial markets as it is of anything else.
After the financial meltdown, commentators claimed that everyone on Wall Street had learnt their lesson.
They had. But not in the way most thought. The lesson Wall Street learnt was that they could stretch the market as far as they wanted, and if it broke, the government would ‘fix it’.
Well, it’s all happening again. But don’t look on the negative side. Look at the positive. Because, just like last time, investors could make a fortune before the stock market crumbles…
Free Reports:
We couldn’t help but smirk on reading this report from Bloomberg:
‘Derivatives that helped inflate the 2007 credit bubble are being remade for a new generation.
‘JPMorgan Chase & Co. is offering a swap contract tied to a speculative-grade loan index that makes it easier for investors to wager on the debt. Goldman Sachs Group Inc. is planning as much as 10 billion euros ($13.4 billion) of structured investments that bundle debt into top-rated securities, while ProShares last week started offering exchange-traded funds backed by credit-default swaps on company debt.’
The report quotes Lawrence McDonald, chief strategist at Newedge USA. He says these types of securities are the sign of a market top. We won’t get bogged down in the fact that it wasn’t the derivatives that was the problem. The problem is central banking and fiat money. But we’ll leave that for another day.
We say the opposite to McDonald. We say the appearance of these securities is evidence that the top is yet to come. In fact, we’ll go further — this is the clearest sign yet that the boom has barely started.
We’ll admit that playing booms and busts is a dangerous game.
Play the game for too long in a boom stock market and you can soon get your fingers burnt.
The same goes if you’re short-selling a market that’s going down the gurgler. Hang in there longer than you should and the market can turn around and eat you up.
However, like it or not, playing booms and busts is a big part of any market.
Many investors seem to forget that there’s another side to a market crash — it’s the boom that goes before it. This is one of the biggest frustrations we have with those who are always so keen to call the top of the market.
They seem to be oblivious to the fact that the market has continued to climb as their calls about a bubble grow louder. Think about it; for the past six years almost every commentator has warned about the building of a new asset bubble.
OK. That’s fine. We’ve got the message. Thanks for the warning. But how about doing something crazy…such as trying to make money from the asset bubble?
That’s what we did for over five years at Australian Small-Cap Investigator. We picked speculative stocks that had a great chance of bagging big returns. Since the start of the year we’ve largely handed over the reins to hotshot analyst Tim Dohrmann.
He’s shown readers his own style of small-cap research, and it’s starting to pay off nicely. Details of Tim’s top small-cap stock picks are here.
But let’s get back to the broader market.
The following chart shows why we prefer to play the bullish side rather than the bearish side. You only have to look at the chart of a typical stock market boom and bust to see that it’s much easier to make money from stocks that go up, rather than from stocks that go down.
Here’s the US S&P 500 index to show our point:
The chart runs from 1990 through to today. That’s 24 years. Of those 24, the market has trended upwards in all but maybe six of those years.
In other words, 75% of the time stocks have gone up. Even over the past six years when money printing and central bank bailouts have dominated the news, the stock market has kept trending higher.
It just seems to be such a no-brainer. If stocks are going up and it appears to be another inflationary boom, then heck, why not try to make money from it?
It has been a great way to grow a portfolio over the past 24 years.
Of course, the trick is to pinpoint the moment when the market will turn. That’s not always so easy.
We’re about to say something that may surprise you.
Many have called your editor a big head and know-it-all from time to time. That’s OK. We’re a big lad (6’4”); we can handle it.
But as good as we may be at spotting key short and long term investing trends — and identifying cracking small-cap investing opportunities — we’ll admit that we can’t guarantee that we’ll pick the top of the market before it turns.
Believe us, we’re always on the look out for signs of a market top.
And so far, despite the shrill noises of the mainstream media, no one has convinced us that the market top is anywhere near. Even the news that Wall Street is dabbling with complex derivatives doesn’t scare us.
If you’ve done your homework on the 2008 meltdown (as we have), you’ll know that the story behind that crash didn’t begin in 2007. Wall Street started creating subprime securitised loans and derivatives back in the 1980s.
It took many years of artificially low interest rates and the growth of ever more complex securities before it had the lethal effect on the market. And what happened over that period?
That’s right, check out the chart we showed you earlier. Between 1990 and today the US market is up 455%. That’s a pretty good gain by anyone’s standards. It’s an average gain of 19% per year. That’s what you call better-than-the-bank returns.
As we’ve repeatedly warned you, a crash will come. But it could be years or even decades from now. So until it happens why not try to make the most of this crazy bull market while you can?
We are. You should too.
Cheers,
Kris+
The post Why You Must Play the ‘Boom and Bust’ Stock Market Game… appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
