Do Not Make this Investing Mistake

Pessimists sound smart, optimists make money…

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2022 was the worst year for stocks since the Global Financial Crisis.

This was music to the ears of “the bears” – or investors who have a pessimistic bias.

But unfortunately for Michael Burry, Robert Kiyosaki, and the rest of the doom and gloom crowd, being bearish is a terrible investing strategy…

…as the math is simply not in their favor.

Get the Big Picture Right

The trajectory for the S&P 500 over the last century is “up.”

Whether it’s the Great Depression, World War II, 9/11, or COVID-19, the S&P 500 has always recovered to make new all-time highs. This is a core reason why I hold a large percentage of my portfolio in S&P 500 ETFs.

But the S&P 500 always bouncing back to all-time highs is only part of the story; between 1926 and 2021 the index finished in positive territory 74% of the time:

That means every year US stocks have a down year, stocks rise for three years.

Going one step further, bear markets are historically much shorter than bull markets. The average bull market lasts 991 days compared to 289 for bear markets. That means bull markets last nearly three-times longer than bear markets.

These three reasons alone make it worthwhile to have a “bullish bias.” But when you understand secular bull markets, it crystalizes why it’s hard being a long-term bear.

Explaining Secular Bull Markets to a Teenager

My 14-year-old nephew Skyler came to visit a few weeks ago.

He follows my social media accounts and was asking some questions about how the stock market works.

Eventually, we came upon the topic of secular bull markets. It’s an esoteric topic for a high school sophomore, but like any good teacher I was able to relate it to something he knows well: Fortnite!

I told him a secular bull market is like when his Fortnite team is on a long winning streak. You might have some tough matches along the way, but you’re still winning more than you’re losing.

That's what a secular bull market is like for the stock market - it's like a long winning streak where stocks keep going up, even if there are some ups and downs (e.g. bear markets, recessions, etc.) along the way.

Secular Bull Markets 101

A secular bull market means the general trajectory for stocks is “up.”

These special types of bull markets are driven by forces that could be in place for decades, including multiple expansion, earnings growth, and falling interest rates.

While the long-term path for stocks is higher during secular bull markets, there are often bear markets, recessions, and even crashes during these periods.

But just like in the Fortnite example, the “big picture” is stocks are rising more than they’re falling.

A Brief History of Secular Bull Markets

There have been three secular bull markets since World War II.

The first was from 1949 to 1966, a period that saw stocks rise 536% (or 31% per year):

And there were certainly bumps along the way, including the Korean War, Cuban Missile Crisis, and assassination of President Kennedy. But despite the “wall of worry,” stocks still marched higher.

The next secular bull market was from 1980 to 2000. Despite two recessions, the Gulf War, Black Monday (the worst single day in market history), and the Savings and Loan Crisis, the S&P 500 rose 1,256% during this period:

So, this begs the question: are we currently in a secular bull market?

My answer is…

Keep Riding the Bull

Despite the S&P 500 falling into a bear market last year, I believe we’re still in a secular bull market.

My analysis shows this secular bull market likely started in 2013 when the S&P 500 breached its previous secular bull market high:

Previous secular bull markets last between 15 and 20 years (depending on what you use for a start date). Since the current secular bull market started in 2013, that means the current secular bull market should last another 5 to 10 years at minimum.

And assuming Secular Bull Market 3.0 delivers returns like previous cycles, that means we could have between 150%-300% gains in the S&P 500 during that period…

…and those estimates are conservative.

The Most Common Investing Mistake Is…

One of my investing mentors once told me, “It’s easier to sound smart when you’re bearish.”

It was then I realized the most common mistake investors make is they’re too bearish!

Because if you look at the math on long-term returns for US stocks, it doesn’t make sense to have a bearish bias.

Instead, your goal should be to catch secular bull markets and ride them until they end… not constantly look for the next crisis.

And that’s exactly what I plan to keep doing.

Stay safe out there,

Robert