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How to Stay a ‘Genius’ When the Bull Market Ends

By Dr. Steve Sjuggerud, President, Investment U
Friday, November 14, 2003: Issue #289

Okay, I’ll admit it. I’ve been checking in on my portfolio a lot lately

Hey, it feels good. It looks good. Almost everything is up. And many positions are up a lot. It’s fun. But I need to remind myself, and you, of today’s message:

‘Never confuse genius with a bull market.’

As long as we don’t get carried away and start thinking that we suddenly have the Midas touch – and that we’ll retain it forever – we can avoid getting walloped when this bull market finally ends.

And my friend, it is a BULL MARKET. Everything is up. As much as you and I might like to take credit for being smart, it didn’t take genius to make money this year. In fact, it seems like forever since we’ve had a year such as this, when everything is up

Consider these year-to-date returns on different assets:

Big Stocks (the S&P 500): 20.30%
Small Stocks (the Russell 2000): 41.3%
Tech Stocks (the Nasdaq): 47.3%
High Yield Bonds (Merrill): 23.3%
Gold Stocks (the Gold BUGS Index): 53.5%
Real estate (U.S. existing home prices): 9.0%

Those returns might lull us into feeling like ‘winter’ never comes in the markets. Heck, here in North Florida this year, you’d have believed the same thing. It felt like 80 degrees yesterday without a cloud in the sky. But then a powerful, cold wind arrived, announcing the end of the summer-like conditions. At home, highs tonight could be 40 degrees cooler than daytime yesterday.

But what does all this have to do with the markets? It serves as a reminder that chilly winds will inevitably replace the current wildfire on Wall Street

I’m not trying to be a pessimist here. It’s just a simple fact. Back in 1999, a lot of new investors thought they were geniuses that they could do no wrong that whatever they bought went up – a lot!

But winter followed summer, as it does. Stocks regrouped for a few years. Fortunately this year summer came again, as it does. Investors can once again think that they were smart, as their portfolios are up.

The cold wind has not hit the markets – yet. All seems perfect in the markets now. No telling what could upset things. But like the cold wind that hit us here out of the blue yesterday, it’s only a matter of time.

So please, never confuse genius with a bull market.

It doesn’t take genius to make money in an up market. It does take smarts to not lose much in a down market. But how can you do that?

Stay humble, and cut your losers early. If you do that, then you are a genius – instead of riding your losers all the way down, you will have sold near the top.

A word of advice, though: If you do cut your losers and you weather the downturn just fine, don’t bother crowing about it to your neighbors They won’t give you credit for being smart, because a loser is still a loser, after all But that’s okay, because the real payoff will be to your bottom line.

Good investing,

Steve