Written by Millionaire’s Digest Team Member: Steven Smith
Founder & Owner of: Esquire Investing
Millionaire’s Digest Team, Contributor, Books, Business, Education, Entrepreneur, Successful Living ad Technology Writer
A bull market is defined as follows: A market in which share prices are rising, thus, encouraging buying. Naturally, human instinct would suggest that you should buy large, prominent, and conservatively financed companies when their shares are continuously rising. However, as Benjamin Graham notes in The Intelligent Investor, as shares rise, the riskier such shares become. “[W]hen stocks grow faster than companies, investors end up sorry… A great company is not a great investment if you pay too much for the stock.” (Jason Zweig’s commentary on p. 181).
Significantly, the bigger a company gets, the slower its shares grow. The intelligent investor becomes interested in large growth stocks (a company stock that tends to increase in capital value rather than yield high income) not when they are most popular, but when something goes wrong. (Zweig’s commentary on p. 183).
How do you identify a bull market, you may ask? As noted by Graham, nearly all bull markets have shared the following well-defined characteristics:
- Historically high price level;
- High price/earnings ratios (current market price of a company share divided by the earnings per share of the company);
- Low dividend yields as against bond yields;
- Much speculation on margin; and
- Many offerings of new common-stock issues of poor quality.
Further, you may ask, what does the intelligent investor do when he/she identifies a bull market pursuant to these characteristics? Graham suggests that as a market advances, the intelligent investor will from time to time make sales out of his/her stock holdings and place the proceeds into bonds. Consequently, when the market begins its inevitable decline, the intelligent investor will reverse this procedure (Graham at p. 197).
Again, if you have not done so already, do yourself a favor and purchase The Intelligent Investor. It may be the greatest investment you’ll ever make.
Article Credits: Steven Smith
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