With the number of prominent fund managers commenting on it recently, I guess it's official – we're in a real bull market now. And that raises some very important considerations for investors, especially when it looks like everyone's making effortless money.
Aconex Ltd (ASX: ACX) was recently bought out at a hefty premium by cashed up foreign giant Oracle, despite slow revenue growth and reported problems integrating recent acquisitions. CSL Limited (ASX: CSL) shares are also up 40% for the year.
That's even before we get into speculative territory, with Getswift Ltd (ASX: GSW) up 903% in the past 12 months, and Avz Minerals Ltd (ASX: AVZ) up an astonishing 2,087%, according to Google Finance.
What's the problem with all this? If you've made a lot of money – good for you. Still, there are several reasons to be concerned.
- Making easy money can hide the risk taken to achieve it. Many companies, including Getswift and AVZ, have nowhere near the revenues or profits that would justify today's share price.
- Making easy money can make you think that the things you look for – e.g. promising lithium explorers, early stage software companies, or whatever – will make money in all markets
- Making easy money makes you less paranoid about the risks in your portfolio and less willing to accept contrary opinions about the stocks you hold
There is also a more immediate consideration – the expected long-term returns of owning a stock. Paying more up front – 40% more in the case of CSL – can have a big impact on the expected returns of your investment. Companies might grow profits strongly, but the growth in share prices will be much lower because you paid a higher price up front.
It's always important to consider an investment in the context of a company's long-term future. Companies that are hot right now will not remain so forever. Just look at Telstra Corporation Ltd (ASX: TLS) – $5.80 in 2016, $3.74 now. Vocus Group Ltd (ASX: VOC) ? $9.40 in mid-2016, $3.23 now. Every dog has his day, and that's as true of stocks trading at the top of the market as it is for (some of) those trading at the bottom.
