Stock market bubbles happen when greed (or at least the excitement of money to be made) pushes prices to unrealistic heights.
Conversely, bear markets, when there is more pressure on the sell side than the buy side, happen when investors become disillusioned with over-priced equities.
Bull and bear markets tend to raise or lower all stocks, but often hit some sectors harder. Not surprisingly, the stock sectors that take the biggest hits are often those previously floating on the bubble.
It is easy to assume that markets are either driven solely by fear or greed. While that may be the case when markets are expanding or contracting, it doesn’t explain how the markets behave in between raging bulls and roaring bears.
Stock Fundamentals Rule
During these times, fundamentals rule rational investing - there will always be those who impulsively jump into and out of the market.It is easy to overlook the fundamentals, both economic and market related, in the heat of a soaring or crashing market, but you do so at your own peril if you are a long-term investor.
Just as in the dot.com boom, companies still need to earn a profit and pay their bills to prosper. There is no excuse for dismissing these fundamental truths.
No matter what the market is doing, companies that have a sustainable business model, strong cash flow and little debt are going to come out of any boom or bust in good shape
Investment Truths
It is worth repeating these investment truths:- The economy is not the stock market
- Stock prices may or may not represent a company’s true value
- Good companies are long-term good investments
A stock’s price is only important in establishing when is a good time to buy or sell.
Long-term investors have time on their side - time to let aberrations in the market work themselves out. Take advantage of time and let good companies show their true value.
