The Curse of a Bull Market

Most people live in a state of ‘‘When I finally…’’, as in:

‘‘When I finally reach this goal, have this much in savings, get this dream job, etc., then life will be good.’’

We hope life will eventually become devoid of problems and struggles.

But guess what? It doesn’t work like that.

Life is about choosing the problems you’d like to solve. If you don’t have any problems, you’re not trying anything new. You’re not growing.

The same applies to managing money. We all wish we were in a perpetual bull market where stocks go up indefinitely with little volatility. However, the best learning opportunities present themselves during market pullbacks or total meltdowns.

Except for a few brief periods of volatility, the performance of the S&P 500 index has been stellar for 15 years, thanks to improving fundamentals and multiple expansion (an increase in the multiple investors are willing to pay for those fundamentals).

As of last month, the S&P 500 had produced a ten-year annualized return of almost 13%. In contrast, the index’s annualized return since inception (1926) has been closer to 10%.

A 3% difference might not seem like much, but over 10 years, your $100,000 investment became $340,000 instead of $260,000. A 3% annual improvement boosted your total gain by 50%.

While it might seem like a blessing, it creates two kinds of problems:

1. There wasn’t much to learn during that period. Anyone who’s entered the market during the last 15 years and bought large-cap ETFs has done extremely well. People learned the wrong lesson (i.e., investing is easy).

2. Many people are probably extrapolating these unsustainable returns for another 10-15 years, aiming to finally ‘‘make it’’ and live stress-free.

As we’ve seen lately, the market always has a way of humbling us and keeping us on our toes.

I can assure you that more unpredictable things will happen over the next ten or twenty years.

What if we get another lost decade like 2000-2010, when returns on US stocks were essentially flat for ten years? What if you don’t get the outcome you hoped for or think you deserved? Are you prepared?

This post is a reminder that problems are not going away. Stress is not going away. Volatility is not going away.

And it’s okay.

Of course, reaching long-term goals is important, but it’s not everything.

You’ll never reach a final state when you’ve ‘‘made it’’.

Instead, think about the problems you’d like to solve or the things you’re willing to struggle for.

What can you learn today? How can you improve?

That’s where the real meaning is.

If you’re a microcap investor, well, there have been plenty of challenges and learning opportunities over the last few years. The picture hasn’t been as rosy at the S&P 500. Microcaps have underperformed for the better part of ten years. It’s been a tough market.

Now, who’s best prepared for what’s next? Microcap or large-cap investors?

See, the blessing of a 15-year bull market in large caps might also be the curse.

No adversity. No opportunity to develop grit and resilience.

Don’t count microcap investors out just yet.

Who knows, maybe one day our asset class will outperform for a sustained period.

And when it finally does, we’ll be good, right?

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Disclaimer

This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont.

If you’d like to invest in small public companies, check out this post.