So what if the market drops a little from time to time? That's inevitable, and in the long term, healthy.
The fact remains we're in a bull market. We have been since March 2009.
But now, especially with some early 2014 swings, investors may be wondering.
How long does this bull have to run and what should we do next?
I don't have a crystal ball... but I do have 30 years' experience - starting in 1982 on the floor of the Chicago Board Options Exchange, then running a big bank's hedge trading, then a Wall Street trading desk, and finally managing my own hedge funds.
I know many investors stick to a buy-and-hold strategy or more actively trade. There's a place for both to maximize this market.
But before you can start making money in the market, you need to know what's really happening...
This Bull Market Has Just Begun
You have to plan how you're going to invest based on where you see the market going and how it's going to get there. It's all about the most important underlying aspect of the market, any market; it's about riding the major trend.
This market's major trend is up. And, as we've said, it's going to continue.
We didn't just get here magically; we followed a certain path, and it's not veering soon. In the U.S. we're close to market highs across all the major benchmarks, up from those 2009 lows.
The long rally wasn't so much a blazing bull market as it was a major bounce off the devastating selloff in financial assets that spawned the Great Recession.
Remarkably, after all is said and done we're only about 15% higher than the old 2007 market highs. In other words, the new bull market has just begun. Here's why:
Stocks moved higher foremost because they were grossly oversold...
Low interest rates allowed corporations to reengineer their balance sheets...
And huge layoffs, inventory liquidations, and deleveraging all "streamlined" companies.
Then, as emerging markets recovered faster than developed economies, global trade increased diversification of revenue streams. Margins began to increase, which buoyed bottom-line profitability, and as the world crawled out of its stupor, top-line revenue growth expanded.
Ultimately multiple expansions took equities back to their 2007 highs, as investors reacquired their faith in capital markets, earnings, and growth prospects. The second half of 2013 was a momentum-driven boost that set the stage for the new bull market.
That's our starting point. There's something else at play here, something underlying, something very big. As I alluded to in my last piece, while the demand for equities has been strong, there are far fewer companies and shares to invest in here in the U.S. The demand equation is itself extremely bullish.
The U.S. economy is healing, too slowly for sure, but it isn't contracting. Globally, other developed economies and emerging markets are a mixed bag, but we're all in this together and we'll eventually all get through the "deleveraging" and "corrective" phases necessary for global growth to firm up and expand.
If U.S. economic growth picks up, and over the next four to eight quarters global growth picks up, we're only in the first leg of a generational bull market. I believe equities could double from here and potentially go a lot higher after doubling.
Of course that doesn't mean there aren't risks on the horizon. There are plenty of risks. But to make money you have to have a starting place from which to plan your moves, and mine is that we're going higher, eventually a lot higher, that's the major trend.
There are two ways to play the rising market from here.
These Shares Are the Key
Whether you're a long-term holder, the old buy-and-hold set, or a more active trader, it makes sense to start with the same core portfolio.
A base of six to eight stocks is a good start. You can be diversified and sleep at night with the right mix of these core positions.
Own an oil and gas major, one that pays a big dividend; maybe BP plc (ADR) (NYSE: BP) works for you. This position plays on energy consumption in the face of growing demand as the global economy heals and expands.
Own a diversified industrial conglomerate that pays a good dividend; maybe General Electric Company (NYSE: GE) is a good start. This position plays on the industrial base of machinery, goods, and services that are all necessary for an increasingly industrialized world.
Own a couple of technology stalwarts - not high-fliers, but tech giants that have been around and are part of the fabric of the economy, the global economy. They should generate tons of cash, pay good dividends, and still can come out of the box with breakthrough products and services. Microsoft Corporation (Nasdaq: MSFT) and Apple Inc. (Nasdaq: AAPL) are cornerstones.
Own a giant, global player in consumer goods that has a diversified array of household brand-name products that are sold all over the world and that pays a fat dividend. Unilever N.V. (ADR) (NYSE: UN) is one.
Own a diversified company with a big presence in agricultural products and life sciences that pays a healthy dividend. E. I. DuPont de Nemours And Co. (NYSE: DD) comes to mind.
That's a core group of stocks that covers all the major bases. The underlying theme: All are giants, aren't going anywhere, and pay excellent dividends.
For buy-and-hold types and trader types, these core positions should be added to on market pullbacks. Not only will you be lowering your average cost, you'll be increasing your annual dividend yield.
Another reason I like big stocks like these as core portfolio positions is they will spinoff and divest themselves from time to time of divisions and downstream operations, which they package as a new stock and give to you as a kind of gift, which adds additional diversification at no cost to you.
There's more to positioning yourself if you're a buy-and-hold type. With every bull market there are going to be runaway winners, which you'll want to seek out and include in your portfolio. A lot of these will be pharmaceutical and technology stocks, companies that are changing the way we live and how long we live. I also like food and farm stocks for buy-and-hold investors. All of these will soar in the generational bull market we're in.
This Is Classic Carl Icahn
If you're a market timer or trader type, you're speaking my language. I like my core portfolio to be the base of my trading. A good core portfolio supplies income and offers stability and discipline. My trading nature appreciates big pullbacks so I can add to my core positions.
But, as a timer and trader, I still enter most positions from the long side in a bull market. The trend is always your friend. It's here, taking a ride on potential blockbusters that's exciting and very, very rewarding. The soon-to-be exploding second leg of this generational bull market is going to make smart timers and traders very, very rich.
And since timers and traders expect ups and downs, not only do we not fear downdrafts, we relish them.
This bull market will have its selloffs, and there will probably be a few that will hurt. But being in positions that benefit from falling markets, which always fall quickly, can be hugely rewarding. It's easy now to position yourself for a selloff in any industry, any market, any asset class, and almost any country, thanks to ETFs.
If you're inclined to play the timing and trading game (the biggest, most successful bank trading desks and most of the biggest and most successful hedge funds are all traders and not buy-and-hold types) and aren't an expert in that game, look for smart investor/traders like Carl Icahn, David Tepper, or George Soros to follow.
Or, check out any of the newsletter services or trader blogs run by folks you've heard of and trust, and see if following along opens new vistas and profit opportunities for you. I have no doubt it will.
For more about how to play this generational bull market - and to get all of Shah's Insights & Indictments delivered to your inbox, free, enter your email address below.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.