The market moves in cycles. There are market cycles for all assets and throughout a market cycle an asset typically goes from being undervalued to being overvalued and reverts back to its mean again. Some market cycles can last for a very long time, up to 20 years, and they are called secular bull markets or secular bear market.
It can be very profitable to invest in a bull market cycle with positive upward movement. If you invest in commodities during a commodity bull market cycle you will do very well simply by buying and holding commodities. The same is true for stocks in general during a stock bull market cycle. You can make a lot of money by just buying and holding an index. A market will eventually turnaround so its important you understand what stage of the cycle you are in.
If you invest in a market cycle on the top or on the way down you are in for trouble. Prices in general will be falling and it will be ever more difficult to make a positive return. You can still make money during a bear market but the level of difficulty increases substantially. Wouldnt you rather go with the tide than against it?
What investors ought to know
1. Stocks always go up in the long term?
Unfortunately not true. Far more companies have failed than succeeded. Many more stock exchanges failed than succeeded. Russias stock exchange disappeared in 1918 after the Bolshevik revolution and all the Eastern European stock markets disappeared after 1945. The shanghai stock exchange was closed in 1949 and the stock exchange in Egypt was closed in 1954.
Even if the stock exchange does not fail the inflation adjusted market return does not increase over time. The chart below shows the US Dow Jones Industrial Average (DOW) market return over the last 80 years priced in gold. I price the market in gold instead of dollars because gold holds it value throughout the ages and its a better constant than dollars. The US dollar is only worth 2% of its dollar in 1913.
So much for investing for the long term. If you had bought the DOW in 1929, held it for 80 years and then sold in 2009 you would be down 49%. If you had on the other had invested in the stock market 1980 at the low point and then sold in 2000 you would have made a return of 4600%.
Chart of the Dow Jones Industrial Average index priced in ounces of gold.
2. Real Estate always goes up in the long term?
This is not true either. The US housing market moves in cycles and fluctuates in value. The chart below shows the US housing market over an 80 year time period priced in gold. It has gone through several cycles with a low of 100 oz gold and a high of 700 oz gold.
In addition, the average return in housing for the native American Indians, the Mexico's Aztecs, Peru's Incas and all those people who lived in countries that became communist during the 20th century was zero and they also usually lost their lives.
Chart of US average housing prices in ounces of gold.
3. How do I make money in the market?
First, the chart will give you a good idea where in the cycle we are. You can also look at historical price levels. A fair value has historically been 10 oz of gold for the DOW. During the bottom in 1932 and 1980 the DOW was worth 2 oz of gold and 1 oz of gold respectively for a short period of time. That would be the best time to buy stocks. During the peak the DOW was worth 18 oz in 1932, 28 oz in 1966, and 44 oz in 1999.In my opinion the DOW will once again be worth 1 oz of gold at the end of the current commodity bull market.
The same market cycle applies to the US housing market. The average price of housing in the US has been 200-300 oz of gold. During the bottom of the housing market you could buy a house for around 100 oz of gold and during the top it cost as much as 700 oz of gold.
Enormous transfers of wealth take place between the top and bottom of secular long term market cycles. Investors who understand these cycles will be able to make fortunes. Someone who buys commodities during the bottom of the commodity cycles will be able to sell close to the top and buy up real estate and stocks at bargain prices.