Why it’s important to keep your head in a bull market

Making effortless money probably hides the risk taken to make it.

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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.

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Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended ACONEX FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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