What is a bull market and how can an investor define it

What is a bull market

Bulls butt their opponents and then raise them on their horns. Investors, who are called "bulls", act in a similar way - they make money on the rise in asset prices. They sort of run into stocks, bonds, commodities, currencies, real estate, grab them and raise the price up, and then sell them at a higher price.

Period on exchangewhen most investors behave in this way, it is called a "bull market". At this time, the demand for assets is high, everyone wants to buy something, and prices go up and up. At some point, investors begin to believe that this is for a long time. Then it happens self-fulfilling prophecy: asset value continues to riseT. Felin, N. J. Foss. Social reality, the boundaries of self-fulfilling prophecy, and economics not because of business success, but because of investor confidence in continued growth.

Of course, not only sentiment influences the emergence of a bull market, but also more objective factors. So, after crises, the economy is recovering, people have more money for

consumption, and companies make good money on it, which leads to an increase in the value of assets.

Since World War II,Stocks are at an all-time high. Here's what stopped the last 12 bull runs / CNN Business 12 similar periods. The last of them is happening right now - a large part of the world economy is growing steadily after the financial crisis of 2007-2009. And not even the coronavirus pandemic has stopped this bull market, the longest on record.

How to know when a bull market has come

There is no particular universal metric. The bull market is just a metaphorical definition of one of the phases of the economic cycle and the positive sentiment on the exchanges.

Financial professionals tryBull Market: Glossary / Investor.gov somehow translate it into numbers. A common metric is the “20/20/20 rule”: after a collapse of at least 20%, asset prices rise by 20% or more for two months. It is sometimes added that the end of the bull market is another fall of at least 20%.

Accordingly, the investor can plan purchases at the time when steady growth begins soon after the fall. However, things are a little different for different assets.

On the stock market

The easiest way to track growth in this market is to look at the large indicesthat cover different sectors of the economy. As a rule, such indicators rise together in good times and simultaneously fall during a crisis.

In addition to the indices themselves, it is important to pay attention to three other factors:

1. Growth in total business revenue. As a rule, it grows at the same rate as the country's GDP. The higher the demand for goods and services, the more businesses earn from them. The growth of this indicator can be seen in the first quarter financial statement during a bull market.
2. Increase in the rate of return. The more goods a company produces, the cheaper a unit of production is for it. And if the firm got 20 kopecks from each ruble before the bull market, then it can be 30-50 kopecks on it.
3. Improved multipliers. Investors love to use formulas for analysis. And in moments of active growth, multipliers will show clear positive trends - from the ability of companies to recoup themselves to financial efficiency.

On the bond market

Debt investors also use indices - not stocks, but bonds. For example, the Moscow Exchange calculates RGBITR, "Moscow Exchange Government Bond Index". And the financial agency FTSE Russell made up 11 indices on British debt alone.

The main thing that they reflect is the overall market return. bonds. In calm times, such securities bring little, sometimes 0.39-1.58% per annum: but even this is higher than inflation in developed countries. And in times of crisis, profitability can skyrocket up to 20-30% per annum in dollars.

The indices show that the bond market in developed countries has not ended since the mid-1980s. During this time, they have never made investors lose money.

On the commodity market

Assets in this sector typically include precious and industrial metals, fossil fuels, grains, and more. Due to the variety of goods, there is no generally accepted index.

But economic cycles can be traced quite well: just look at the historical charts. For example, gold experienced a powerful bull market in 2000-2011. For ten years, an ounce has risen in price by 4-5 times.

Experts linked the growth to the surge in the production of computers, smartphones, set-top boxes, hundreds of smart home appliances. They all required microcircuits in which gold was used as a conductor. As demand increased, so did the price.

Industrial metals are also actively growing right now: copper, aluminum, steel, cobalt, nickel, zinc and the like. Economists explain what is happening for various reasons: from the recovery from pandemic quarantines to the soaring popularity of electric vehicles and renewable energy.

How an investor should act in a bull market

Investors have a common phrase: "Everyone is a genius in a growing market." This is partly true, because when most assets are growing, it is easy to make a profit. Here there is a competition not for its fact, but for its size: for example, to earn 10 or 30% per annum.

However, do not forget about volatility. Markets can fluctuate and it is difficult to guess where the bottom of the price was and when the peak will be. You can take risks and try to hit the jackpot, or you can take a moderate risk and earn money on the sly. Here are some strategies - according to the degree of increase in riskiness and profitability.

Buy and hold

This is a classic and most accessible strategy for an ordinary person. The meaning is literal: read analysts, look at the indicators, choose worthy and stable companies, and then buy their shares. And keep them in portfolio all the way, no matter what happens in the markets later.

This option is especially suitable for those investors who are not going to fix profits in the near future or live only on investments. The strategy works well for the future, especially in tens of years.

For example, one of the most successful investors in the world, Warren Buffett, bought Coca-Cola shares in 1988 and still holds it today. For 33 years, the investment has brought 1553% profit excluding dividends.

Buffett probably knew that these securities were with him for a long time. In other words, had investment strategy - a plan that takes into account the horizon, risk tolerance and other personal characteristics.

Buy, hold and take a little risk

The basic idea behind this approach is no different, but it involves additional risks. The point is that the investor separates part of the portfolio, for example 10%, and lets it into more dangerous, but potentially profitable operations.

Let's say the main portfolio consists of safe bonds and stocks dividend companies - it will not bring a lot of money, but it will provide a stable income. A risky piece can be invested in the stocks of fast-growing companies. Or play trader and speculate on asset price fluctuations. Or collect cryptocurrencies and watch the "roller coaster of prices".

The investor can lose money on this, up to all the "risky 10%". But if he seriously analyzed everything and does not panic during volatility, then it may be good to increase the profitability of the entire portfolio.

Catch corrections

No matter how hard the market rushes upward, corrections inevitably occur - short periods when asset prices fall by a few percent, and sometimes by 15–20%. They usually recover quickly, but some investors wait and buy assets precisely at such times, because the yield becomes even higher.

For example, Warren Buffett not only bought Coca-Cola shares, but also took advantage of the correction after the 1987 crisis. Then the securities were worth about $ 2.32, in mid-October 2021 - 53.94. A rough estimate gives 2225% yield. If Buffett had bought shares before the crisis, he would have paid $ 3.03: the difference is small, and the yield changes dramatically - 1680.2%.

Trade "with leverage"

This strategy is no longer used by investors, but by traders - professional participants in the stock market. The point is to invest not only your own money, but also borrowed money - "leverage" - which is usually taken from a broker.

Let's say a trader expects to make money trading the shares of the aluminum producer Rusal. He can invest his capital, or he can ask the broker for additional funds and multiply investments several times, usually 2-5.

But this is a dangerous method because it is impossible to know everything. A trader can count on the growth of shares in 10-15%, and they will grow by only 2%. It's still a profitable trade, but with a bad risk-reward ratio: it would be easier to achieve the same result simply by buying bonds.

It is very difficult to calculate and assess the risks, so non-professionals should not use loans for trading on the stock exchange once again.

What are the risks of a bull market to be aware of?

A bull market is generally considered a safe and optimistic time for investors and the economy. But there are several nuances that should not be forgotten.

Growth is not forever

A bull market can last for many years, but one day it will end in crisis anyway. If an investor did not expect a fall, then he can lose a lot of money on risky assets in his portfolio - they lose in value in the first place.

This is how the 2007-2009 financial crisis began: tension in the market had been accumulating for several years, and when it burst out, CDS - credit default swaps - depreciated. It's complicated very risky and profitable mortgage-backed securities.

Some investors did not expect to crash, so they bought too many of these swaps and then failed to sell them. As a result, some large investment banks have even gone bankrupt, such as Bear Sterns.

The bull market is pushing itself into crises

The longer the bull market lasts, the stronger the self-fulfilling prophecy: not economics, but faith, begins to push prices up.

Suppose that the company "Pervaya" began to earn a lot, its revenue, profit margins increased, and multipliers became better. Shareholders will certainly demand increased dividends - possibly at the cost of capital investment and an increase in employee salaries. In the moment, investors will get more money, but in the long run, everyone will lose.

Investors overestimate reality

The psychology of investors also plays a significant role. This is well indicated by the "indices of optimism". There are many of them, one of the most reputable is the Wells Fargo / Gallup Investor and Retirement Optimism Index. Some of the highest values ​​were right before the 2000 and 2007 crises.

Another example of market misjudgment is the pursuit of profitability, which may not be entirely realistic. Let's say Argentine government bonds promise a huge yield - 49.07% per annum. But they are only issued in the national currency, inflation of which in 2021 is at the level of 48%, that is, the real profitability is about a percent.

What is worth remembering

1. A bull market is a period when investors are buying up assets in the financial markets, and prices are still going up.
2. There is no clear metric for the onset of a bull market, but there is a “20/20/20 rule”: after a collapse of at least 20%, asset prices rise by 20% or more for two months.
3. A bull market can occur for any asset, from stocks and bonds to real estate and currencies.
4. The bull market period is the best time for a private investor: you can invest and not take too much risk.
5. There are dangers too. The main thing is not to fall into the trap of "growth will be eternal": it will end, and it is better at this moment not to have risky investments on hand.