A very different bull stock market is at hand

The bearish stock market has done its job. He removed excess bullishness and repriced stocks in line with reality. Like the previous sell-offs, these resets were driven by significant fundamental and forecast changes. Therefore…

Don’t expect the next bull market to look like the last

Times, conditions and attitudes change. However, most investors and many investment professionals will be slow to let go of the past. Their comfort in staying with what they know will hinder their adaptation until they are convinced of a new, better approach. Naturally, that means they’ll have to see proof: superior performance and wide popularity.

The model will be familiar to you:

  • Amid High Negativity and Doubt, Some Stocks Begin to Rise
  • Stock market stops falling and forms a base as negativity subsides and buying returns
  • The stock market begins to rise, producing relief and a willingness to look ahead
  • The rise in the stock market is becoming clear, sparking investor interest and even producing a limited uptrend
  • The new bull market is generally accepted, and now comes the realization that parts of the stock market have vastly outperformed other more familiar areas.

Therefore, the strategy for today is clear:

Start aiming for new stock ideas that can be the most successful. Know that they will be different, and the reasons behind them: new, exciting and fun.

How different?

Very. What will emerge are radically different “themes” that will encompass the winning stocks. Above all, they will have no resemblance to the familiar themes of the past.

Why is there always such a dramatic change? Human nature:

  • In a bull market, themes emerge as descriptors of both logic and winning strategy
  • At their peak, themes become the ultimate approach to equity investing
  • At their peak of popularity, themes produce extreme levels of valuations and return expectations
  • These higher valuations slip when certain concerns are first noticed
  • When worries begin to temper expectations, the slippage becomes a slippage, potentially signaling that a bear market is brewing.
  • As concerns become more widespread and certain, the bear market occurs, ending with a flood of negativity that undermines and discredits these bull market themes and beliefs.

The key question: How to invest in the next bull market themes?

Realize that the new bull market is not predicted in some magic Wall Street planning book. It will evolve with conditions, actions and developments. So the answer is to hitch a ride on the Wall Street wagon. And that means…

Invest using active managers, seeking capital appreciation. Diversify management styles focused on value, growth and eclecticism. Also diversify company sizes (better yet, find funds that aren’t limited by size). Avoid the largest funds – they are too heavy to make timely changes, and they tend to approximate overall stock market allocations to keep their performance in line.

An example: My fund choices

I believe winning in the next bull market will require solid, thorough research backed by experienced portfolio managers. Therefore, I chose the following four equity funds (three from Vanguard and one from Fidelity).

All three Vanguard funds are managed by independent investment management firms selected by Vanguard’s investment professionals. This style of multi-management is practiced by large institutional funds and has been the basis of my career. It makes it possible to pursue the superior performance of specialized managers while controlling overall risk by diversifying the different management styles.

Here are the three Vanguard funds and the number of investment firms selected to manage each (each is linked to the Vanguard funds page):

  1. Vanguard Windsor Fund (value funds): two investment management companies
  2. Vanguard Growth & Income Fund (growth and value mix): three investment management companies
  3. Vanguard Explorers Fund (specialized growth fund): five investment management companies

The Fidelity fund is managed solely by Fidelity, which has a history of successfully identifying new growth themes. This fund focuses on the best choices and the small size of the fund allows it to be versatile.

Loyalty Driven Stock (specialized growth fund):

  • Holdings: 40 companies
  • Fund size: $3.2 billion
  • “Active share” (scale is 0% for index funds to 100% for full divergence from the S&P 500): 66%

The Bottom Line: Be Positive, Think Different, and Act Now

The main investment challenge is dealing with a new alternate universe that is unlike any predecessor. With a tectonic shift, like the one underway, investors’ beliefs in the latest set of “fundamental truths” are undone. In their place are uncertainties that seem to indicate a need for caution.

However, we should welcome the new focus on risk amid hazy forecasts. This mindset keeps valuations in check and therefore makes potential returns more attractive.

So be happy this is the start of something new and everyone is facing the same unknowns. Now, everything we need to do is be invested in a way that allows us to catch the upcoming new excitement long before it becomes popular.

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