Howard Marks from Oaktree Capital has an interesting saying about bull markets and trends in general:
Very early in my career, a veteran investor told me about the three stages of a bull market:
• The first, when a few forward-looking people begin to believe things will get better;
• The second, when most investors realize improvement is actually taking place;
• The third, when everyone concludes things will get better forever
Mr. Marks doesn’t forget to point out that the third stage could continue for a very long time and deliver substantial returns to those that know how to ride trends and manage risk properly.
Even when an excess does develop, it’s important to remember that “overpriced” is incredibly different from “going down tomorrow.” Markets can be over- or underpriced and stay that way—or become more so—for years.
Sometimes, the next big thing in the stock market is the last big thing. This week’s action in biotech and semi-conductors is good example of this notion. $IBB went up 67% in 2013. Then when almost everyone thought that it had moved too much too fast, it went another 34% in 2014. So far in 2015, $IBB is up more than 14%, vastly outperforming any other sector. How long is it going to last is anyone’s guess.
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