Is the Stock Market a Bunch of Bull?

December 10, 2013 11:12:00 AM

Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. - Sir John Templeton

I love the quote above. I have used it in previous blog pieces over the last five years to verify my belief of investing in great companies for the long-term.BlogImage

I like the play on words in the title as well. After all, with the amount of negativity I have heard over the years and continue to hear today, one must ask themselves, is the bull market we are seeing in stocks 'a bunch of bull'? There is no doubt in my mind that we are NOT living in a period of stock market euphoria, let alone any sort of optimism!

Over time I have learned that you must be positive when investors are negative and negative when investors are positive. Although this might seem counter-intuitive, history seems to bear it out.

Frankly, this is precisely why I continue to LOVE the NEGATIVITY among many investors as they continue to succumb to the fear and uncertainty of owning equities.

As I have said many times, investors must look at their investments like a business owner. Own great businesses over time and like a true business owner, continue to invest in a great business over time!

Will we see another stock market correction and crash?

Of course we will. However, no one can predict when that will happen or how much the markets will pull back.

So, while many continue to guess what the markets are going to do (let alone a great business), I continue to look for great, well-run companies to invest in for the long-term.

As I referenced earlier, I love that many people continue to be negative about investing in the stock market, talking about the stock market being over-valued and or a stock market bubble.

I prefer to invest as Sir John Templeton's quote says above.

Take a look at the Sell Side Consensus Indicator chart below from BofA Merrill Lynch (as of November 30, 2013). The chart is considered a contrarian gauge for investing. A reading below 55 is considered bullish for buying stocks and doesn't turn bearish until the consensus tops a reading of 65.



At current levels, the indicator is in uy territory, as Wall Street's bearishness is still as bad as it was at the market lows of March 2009. To me, that is astounding! So many investors have missed major opportunities to invest in great companies over the last five years.

Of course, as many of our clients know, we are not in the business of predicting how the stock market is going to perform. We are in the business of continually investing in great companies over time using a tremendous investment tool, the stock market.

However, with all the negative sentiment continuing to permeate the airwaves, I think it's important for investors to understand that there is no way I believe we are in a stock market bubble!

How reliable is the indicator above?

Although there are no guarantees, historically, when the Sell Side Indicator has been this low or lower, total returns for the S&P 500 over the next 12 months have been positive more than 95% of the time.

Lastly, this morning as I was listening to CNBC (Thursday 12-5-13), there was a lot of talk about whether or not we are in a stock market bubble. One interesting comment I heard from Ms. Liz Ann Sonders, Senior Vice President and Chief Investment Strategist of Charles Schwab, was that currently 9 of the 10 S&P 500 sectors are trading below their 25 year trailing earnings average. Meaning, on a macro level, equities are not too expensive let alone in any bubble territory relative to historical valuations.

Why have investors missed out on buying great companies at great prices?

In my opinion, the answer is simple - Investors do not have a solid Investment Philosophy, Strategy, Flexibility and Transparency that has allowed them the opportunity to take advantage of buying great companies on sale.

Instead, they choose to live in a world of fear and uncertainty as it pertains to their investments. As Warren Buffett has said, Be fearful when others are greedy and greedy when others are fearful.

With roughly $2.6 trillion sitting in money market funds in the United States and the trillions sitting in cash around the world, there is no doubt in my mind that today is a great time to be an investor in great companies for the long-term.

So, Is The Stock Market A Bunch of Bull?

No question. This bull market is a tremendous time to be an owner in great companies.

Invest With Clarity!


Mark Pearson

Mark Pearson

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