After a brutal bear market from late 2007 to early 2009 investors were traumatized. In the ensuing four year bull market there have been numerous false alarms where investors thought they were headed for another 2008. The fear of the double dip, the Euro crisis, the US downgrade, the BP oil spill, the flash crash etc.. Each time investors panicked and were made to regret it. It seems that investors have finally learned their lesson and are determined not to get fooled again.
Two weeks into the New Year sentiment is nearing a bullish extreme as investors have been trained not to get shaken. At the same time many of the stocks I own are reaching my price target and I am having a difficult time finding new ones to buy that meet my value criteria. This combination has brought my portfolio to a market neutral posture.
Each time during this bull market when sentiment went to a bullish extreme there eventually was a better entry point for patient investors. Sometimes the exuberance lasted for months but eventually there was a better buying opportunity. It is possible that this time will be different. Maybe investors won’t get scared out this time. Maybe corporations will finally take advantage of the cheap money and lever up. Maybe this bull market will finally reach a level of exuberance typically seen in the late stages of a bull market.
I recognize that this time could be different but I will not invest that way. Sitting on the sidelines while everybody is making money is difficult and not enjoyable. But permanently losing money is even less enjoyable. Buying when there are values and investors are fearful has served me well over the years. That is what I intend to do even though the party seems like a lot of fun.