Bubbles, trading and investing
The parabolic phase of bubbles.
One of the things I have talked about the most in these years is the quantity of people that is recommends investing during the hottest moments of the markets.
There is no difference between assets.
We can always notice that the same patter applies to this: when an asset behaves very well more people recommend buying it.
This argument is valid for gold in 2011, for the Spanish houses in 2007, for the Nasdaq in 1999, for the Nikkei in 1989, the Dow in 1929, or the Tulip Mania of 1635.
In those moments of seemingly unlimited profits it seems that the end of the World is coming unless you do not invest in the assets as apparently everybody else is doing.
The masses, absent in the first stages of the move, start to notice how good supposedly investing in the popular asses is.
The problem is that the standard people do not understand that the moment to make good profits is already gone.
Anybody can buy a stock and sell it six months later for a 30% profit. However that is not investing but trading.
Spanish housing bubble (la burbuja inmobiliaria)
It is well known that in the years previously to 2007 there was a housing bubble.
In the years that went from 2000 and 2007 if you did not buy a house in Spain you looked like an idiot.
The people, your neighbours, would say? “you still have not bought a house?” and looked at you as if you were crazy saying: “What are you waiting for?”
In fact those who bought houses with mortgages was with the mentality that flats never go down in price.
The overall speculation and leverage was gigantic, not very different to other housing bubbles like the American of those years.
The same can be said of the bull markets in stocks. Those do not seem to have an end normally.
The bullish sentiment is always very extreme in the phinal moments of a bull market.
For instance, one of the biggest bull markets ever is that of the American Stock Market after 2009, which does not seem to end ever.
People are assimilating that that kind of market will never end since it is what they have experienced many consecutive years.
The mind gets used to it.
That is why we can see that in moments like that the majority of people talk about investing in the major world indexes for the long term, when it is actually not the best moment probably, after 7 or 8 years of continous bull market.
For example, not long time ago the DAX was rising in a parabolic way.
As it happened later it had to give up.
We can see how a similar development took place in 1999, moments before the collapse of the Nasdaq bubble.
Things not always go up in cyclical reality.
All bubbles and bull markets have a beginning and an end. Even that one of the Dow Jones in the last centuries. That one will also come to an end eventually.
Bubbles are, however, excellent moments for trading the trend.
Short term trading is an ambiguous concept. For some it can be 5 days, for others it can be 5 months.
Why is it good to do trading in those moments?
Well, when we see a market moving in a parabolic way up during a long time, it is more intelligent to buy that asset and let the profits run for a while.
Trading is more effective in the medium and final phases of the bull market.
On the contrary, investing is more effective in the initial phases.
Let us say that when a market has reached the final first stages of a bull market, it goes on rising until it reaches the parabolic phase. In that stage it is easier to take short term profits.
In these cases we are talking about markets that move very significantly.
Besides contrary to bear moves, the bull markets are more “light” or “tranquil”.
For example, if we remember the last moments of the gold bull market in 2011, they were brutal, when most of the related assets rose in a dramatic way.
Another example is that of natural gas at the beginning of 2014 when it reached the final phase of the bull market after which if finally fell a whopping 50% in a short while.
Another very typical example is that of the Nasdaq Bubble of 1999, certainly a very bad year to invest in the long run.
Curiously that year was very good to do short term trading betting in the major trend.
Those who invested in 1999 had losses of 60 and 90% in the coming years. For sure, many of those depressed investors sold their stocks in the worst moment.
Do not invest on the spur of the moment.
One of the basic rules of investing is not invest in those moments.
One of the basic rules of trading says that the best profits come in those moments.
For instance, in 2016 it was very good to trade the long side of the Nasdaq, but it is probably no good idea to invest large sums, considering that the market has not had a significant correction for more than 7 years of bull market.
The most efficient moment to invest surely passed.
The markets always correct themselves.
Sooner or later the correction comes. It may not be in a year or two, but it will eventually come and it will be bigger when the previous bull move was more prominent.
That is why we should always be careful with the advice to invest in stocks during very long bull markets.
It is better to study a bit and see if those assets are in a possible final phase of a move.
Investing, as well as trading, is something very dangerous.
Although trading is a lot more dangerous and difficult than investing.
So, what should we do? Trading or investing?