This story appears in the April 14, 2014 issue of Forbes.
While few ever believe it, only two things end any bull market. Like that simple straight vector you learned about in high school physics—except that bull markets wiggle wildly—it’s either by losing steam or by running up against a newly emergent wall. Keep a lookout for both.
Running out of steam is best seen via legendary investor John Templeton’s four-phase quote: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Upon reaching euphoria bull markets lack energy to propel them further. Bulls climb the legendary “Wall of Worry,” and when all worries wane to well-worn whitewashing, you’re out of steam.
The wall? Any unexpected, immovable bad force. Markets formally digest and discount all known phenomena. What we know about, despite all varied views, is already priced in. Exhibit A: 2008”²s mark-to-market accounting! You should watch for surprises, but not many do. Exhibit B: the inverted yield curve in 2000—when worries vanished—that choked bank lending.
But, no, the wall isn’t, by definition, excess debt, congressional action (or inaction), ObamaCare, Iraq, Iran, valuations, on and on. And it isn’t Crimea (though it might be if Russia truly goes on an unexpected global rampage).
It’s a perpetual problem: Either we can’t observe the situation in advance or we just don’t pay attention.
Solution: Always expect the unexpected! The key and tricky thing is staying on your toes and endlessly looking for it. You’re still unlikely to see it. (Few do, and you’re quite skilled if you’re one of them.) I certainly don’t right now.
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