Are you worried about missing the next bull market in stocks?
If so, you’re not alone.
According to an article in the Sydney Morning Herald, missing out on the next bull market is the biggest fear of trillion-dollar fund managers. After watching stocks fall last year, fund managers at firms like Vanguard and Fidelity are concerned that stocks will rise this year, and they (who have moved into bonds) will miss the action.
They may be right to feel that way. Historically speaking, stocks have gone up in more years than they have gone down. We had one confirmed bear market in 2020, then another just two years later, in 2022. History would predict that a bull market is forming. In this article, I will explore a simple strategy that you can use to ensure you don’t miss the next bull market.
Buy all the way down
In order to buy the bottom in stocks, what you want to do is be buying progressively all the way down to the bottom. This sounds counterintuitive, but it comes from a simple insight: nobody can predict stock prices. All you know is that, if a company performs well, then a lower stock price is simply a better value: it’s nothing to be avoided. You need to know a lot about a company to be able to say that it’s going to perform well despite its declining stock price. Essentially, you need to understand it better than the investor community does. That’s hard but not impossible. You need to spend a lot of time researching a company to know it better than most people do. It will take time, but you can do it.
Buying the dip has historically worked very well
Earlier, I recommended buying stocks on their way down – conditional, of course, on you knowing that they are going down without good cause. If you have that knowledge, then each lower price offered by the market is simply a better buying opportunity.
Consider the experience of investors holding Royal Bank of Canada (TSX: RY) stock in 2007 and 2008. In many ways, they had a scary experience. U.S. banks were collapsing. Canadian banks‘ earnings were declining. RY’s own stock price declined 53%. Basically, it was a scary time in banking stocks during the Great Financial Crisis. Yet, if you’d done thorough research into RY stock, you’d know that:
- Royal Bank has conservative lending practices.
- It was not issuing “sub prime mortgages” (the kinds of loans that caused problems in the United States).
- It is subject to Canada’s extremely strict banking rules.
Basically, RY in 2008 had all the characteristics of a bank that would survive the financial crisis. Even if you’d bought at the top of the crisis, you’d have realized a 115% price return by holding until today. And if you’d bought the bottom, you’d have achieved a 305% price return. Both returns were increased significantly by RY’s ample dividends, of course. So, any time between the 2007 and 2008 bottom would have been a good time to buy. A strategy of “buying all the way down” would have worked.
