The story of sharemarkets — of all human endeavour, really — is one of boom and busts. Someone has a great idea, then others find the idea, too, and start to get enthusiastic.
Their early success — and the green-eyed monster called envy — leads others to want to get in on whatever act is in vogue. With the exception of us here at Motley Fool Share Advisor, of course.
Soon a great idea that became a trend becomes a runaway freight train, and logic gets lost in the exuberance.
All good things must come to an end..
But as sure as night follows day, all booms come to an end. The old saw 'the higher they rise, the harder they fall' takes no prisoners. The gap between excitement and reality gets closed — with a thud.
Then, with a suitable passing of time, the old wounds heal, and people find a new, exciting trend. You know how it's going to end (or rather, continue repeating).
Of course, that's far from a reason not to invest in shares. Australian and global sharemarkets have done exceedingly well over many decades despite the occasional slump.
(And to prove it, the Average ASX return on our Motley Fool Share Advisor scorecard is showing an average gain of 60.1%, compared to the market's average gain of 25.7%, both including dividends.
It is — to use the old Coke marketing line — the pause that refreshes… even if it does hurt at the time.
No two sharemarket cycles are ever exactly the same. And, unlike others that have been in the news recently, I'm not prepared to make a forecast of impending recessions or market crashes.
(As an aside, it's wonderful when you can say there's a '50% chance of this' or a 'one in three chance of that' — you get to say 'I was right' if it happens, or 'I only said it was a chance' if you're wrong. That's the sort of heads-I-win-tails-you-lose bet I'd like to be offered!)
So while it would be easy for me to make such grand (heavily qualified) predictions, I won't. But it's worth seeing where we are in a broad market sense.
Looking at the evidence
Quite often, coming out of a downturn, investors flock to safety and security.
Think banks, infrastructure companies, grocery retailers and big telecommunications companies. Check.
Then, interest is revived in mergers and acquisitions.
In our case, the resources bust has put paid to much of that — and itself is working against the positive momentum of what might otherwise be a more normal 'cycle' — but there has been quite a bit of takeover activity on the ASX anyway.
We've seen local breads 'n' spreads maker Goodman Fielder leave our bourse, Leighton become almost completely owned by its Spanish parent, bids made for Warnambool Cheese and Graincorp, telco mergers being pursued by TPG Telecom and Vocus Communications, and a deal has been done to take Toll Holdings off the market.
So, there's a bit going on.
The next stage is usually a flurry of stockmarket floats by those who seek to take advantage of high valuations and easier money. In recent months we've seen Medibank, Nine Entertainment, Healthscope among others.
Then even more recently, some companies that perhaps would struggle to float at almost any other stage of the cycle. In just the past month or two, we've seen a personal jetpack business, a medical marijuana mob and a skydiving outfit either listed or about to list on the ASX.
I have nothing against any of those companies. I hope they do very well. But when ASX investors are falling over themselves to buy shares in these sorts of companies, you just know that the animal spirits are well and truly in charge!
Dance, duck, or something else?
So what's an investor to do? Head for the hills? Give up and join the party? Neither, fellow Fool! We can't know — though some claim to — when the next market downturn will be.
Those who were calling a market 'top' just a few months back would have missed out on a circa 10% gain in the meantime. A recession is definitely coming — as is a market slump — but we can't know when.
The smart investor, like us here at Motley Fool Share Advisor, sticks to what they know — and what they know will do well. Chasing the 'next big thing' feels tempting — and Warren Buffett was roundly derided for missing the tech boom in 1999.
We know how that ended… with Buffett being right (again) and many tech investors nursing decade-long financial hangovers.
Your path to success..
The investing gains go to the sensible, thoughtful, Foolish investor, who weighs up not just the potential gains, but the probability of success.
It's the latter that is far, far more important — and the first thing that gets forgotten when the market is running hot. It may not be as much fun when the bulls are running, but, like Warren Buffett, you'll get the last laugh.
