Is it time to buy the dip?
Stocks only go up, right. Therefore, the answer should be yes.
At least that’s what the prevailing logic is right now in pubs, online chat rooms, and among the newly-minted trading gurus.
Funnily, I remember observing the same behavior during the cryptocurrency mania, and we all know how that ended.
A common adage on Wall Street is—when your taxi driver is telling you what stocks to buy, you know it’s time to exit the market.
Does that mean the stock market is going to crash tomorrow?
I don’t know. I don’t have a crystal ball. Irrational exuberance typical for financial bubbles can go on a lot longer than it’s reasonable. Hence the word “irrational.”
However, while I can’t predict the future, as a financial professional, and someone with a good deal of investing experience under my belt, I sure as hell ought to know what’s going on in the present.
This is what I see…
The Three Stages Of A Bull Market
As an investor, and as a person, one of the greatest skills you can master is learning how to detach.
In our pursuit to gain an edge on the financial markets and maximize our investment returns, it’s easy to get lost in the moment, the latest news, and the daily price swings.
And the more you focus on the small stuff, the more you lose the sense of the big picture, and the more emotions influence your decisions.
Let’s take this latest dip in the stock market, for example.
Everyone, including me, is feeling the itch to buy it. And why not? The buy-the-dip approach has worked so well in the past.
But let’s detach for a minute.
Instead, let’s look at what stage this bull market is in, and, therefore, what action is most appropriate.
Bull markets come in three stages.
In the first stage, only a few exceptionally smart investors believe that conditions will improve.
In the second stage, the majority of investors recognize that improvement is underway.
Finally, in the third stage, everyone concludes that the market will go up forever.
It’s quite clear that’s the stage we’re in right now.
The first stage began in late March. If you remember, there were not many who were urging to buy stocks at that point. I was, and those listening to me made a tremendous profit.
The second stage took place in late April and May when the COVID cases first started declining, and countries launched large stimulus programs.
And the final stage began in June, with the retail investors stepping in. That’s when we entered the “stocks only go up” era, and when the stock market conversations moved from the financial world into the pubs.
So, if you’re thinking of investing in the stock market at this point, I must disappoint you. You’re late to the party.
Verdict – Making Profits During Bubbles
Finally, let’s answer the initial question—how do you trade this bubble or any bubble for that matter?
And just to be clear, anyone that tells you this is not a bubble is an idiot.
The problem with market bubbles is that they go up fast and down even faster.
Meaning, that once the collapse starts, there’s little time to act.
For that reason, the only way you can profit from a bubble is to get in at the very beginning.
That way, whether you sold before the actual top or during the crash, you’re still making a profit.
If you’ve entered in the second stage, your chances of making money are significantly lower.
And if you’ve entered in the third stage, the one we’re in now, then a loss is almost guaranteed.
Therefore, you should stay on the sidelines.
There will be other opportunities in the future—more than you can imagine.
For now, you just need to be patient, focus on the big picture, and don’t get caught in the FOMO.
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