I sincerely wanted to help him. However, I didn't have a sincere answer for him. I don't know with sufficient confidence where markets are heading these days. (LOL, I don't think I knew that most of the time ;)) The market shows all signs of a maturing bull market. I don't think it is a good market to invest at current prices. On the other hand, for long-term investors, there is no bad time to invest. Over time, over years, the market has been going up. If you enter at the wrong point, you may have to wait some more years before you reap the benefits but if you decide to time the market and wait, you never know how long the current market will keep going up! If the markets really go down from here, you may be able to buy cheap and increase the returns but then also, you have to know at which point you would re-enter. There are so many ifs and buts and no clear answer to me. So I had to tell him that I have no concrete advice for him. Then I said that if I were in his boat, I would stay out for some time!
Why would I stay out for some time?
- The prices for most stocks have exceeded the best-case scenarios. It is really hard to find risks, reasons why Facebook, Apple, Amazon, NetFlix, Google, Microsoft, Nvidia etc could go down from current levels! Everything is just going right for them!! There doesn't seem any risk or negatives that can affect them or the market!
- Most participants don't see any downside in the market. Many seem to believe that prices are simply destined to go up.
- Small caps are doing much better compared to the blue-chips. Most small caps are doing well. Many double or triple in a day. Traditionally, when small stocks start going up, that generally indicates the bull market top.
- Investing has spread to common people! Everyone you meet, speaks like a smart investing guru and has some investing tips for you. People who generally would research for a week or a month before buying a new washer, refrigerator or laptop, would seem to be doing not even 10% of that research while investing 10 to 100 times more money in some stock!
- The Fear Of Missing Out FOMO is rampant! If you don't buy a stock, you are afraid you would end up spending significantly more money tomorrow!
- Many participants are able to make 10-100% return in a week, if not in a day. This kind of rapid movement in stock prices is generally seen towards the tail end of the rally. There is a lot of exuberance among investors.
- IPOs and SPACs issues are selling like hotcakes.
- In politics and media, the economy is not well! They are talking about another 1.9 trillion stimuli. On the other hand, markets are doing awesome. They think the economy is doing very well. Not sure if this is a diversion, or this is because the markets are forward looking!
- Short Squeezes are common. This causes some stocks to fluctuate widely! GME /GameStop is a great example. A friend told me he shorted it when the price was around $42! I didn't even know about this stock! The next day, the stock went to $70 and closed around $60. The next day (today), it touched $150 and closed at $70. In the after-market, it is at $88! From a valuation perspective, the company is doing really bad but looks like some hedge fund managers are caught short in this stock. Another person I know told me today that this stock is going to be above $500!
These are the factors that make me scared, and also make me look stupid in my own eyes! By not trading aggressively in tune with market sentiment, and stock prices trend, I am letting go of good profit opportunities. Sometimes, too much thinking or analysis can hurt too. May I should have told my friend to just do it. Jump in and enjoy the opportunities, without worrying much about tomorrow!
I am curious: what would be your advice to my friend?
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