Rule 1: Strike when they're hot and cut when they're not
And if you ever want some objectivity about the sharemarket going up in the long term, just ask someone from Japan. The Japanese sharemarket has had a woeful run. From Christmas 1989 to Halloween in 2008, it fell 82 per cent.
Take us up to today and the Japanese sharemarket is still down 70.8 per cent in the past 23 years.
Although this suggests we should have avoided investing in Japanese equities over this period, the truth is the equity market is opportunity - even within that terrible performance there have been eight bull markets averaging plus 61.6 per cent and eight bear markets averaging minus 44.3 per cent.
Each lasted more than a year on average; substantial and tradeable periods.
And despite the overall fall of 70.8 per cent, the Japanese market is still up 62 per cent from the bottom and has delivered an average annual compound return of 12.1 per cent for four-and-a-bit years.
The point being that even in a long-term bear market, even when a country has gone effectively ex-growth and is in the grips of deflation - a predicament that must inevitably catch up with both Europe and the US - the equity market can still defy the big trend for long periods and provide plenty of opportunity to make money.
Fast forward to the Australian market today and we are up 23 per cent in seven months.
It is scaring some people, rational people in particular. We seem to be ignoring terminal issues such as rampant money printing and ballooning US and European debt levels.
Are we all mad? We may well be, but the big issues are not the point: the point is that there is money to be made and we owe it to ourselves after five lean years to try to make it.
And in the Japanese context, we could rally another 38.6 per cent and still only discover in hindsight that we were in an average bull market.
So it is no good wagging fingers about how the problems are still there and how central banks have only kicked the can down the street. The game in equities, especially after the global financial crisis, is to "just get on with it" and make money while you can.
While the market goes up, grand predictions about it all ending in tears are as useless as the equally grand declarations that we are now in a new long-term bull market that will leave you in denial when it starts going down. It's all bull.
All you know is to make money when stocks go up and get out when they start going down. You can't do that with a head-in-the-sand, long-term investment approach alone.
To take advantage of the equity market "trends within the trend", you're going to have to time the market.
It's here that 90 per cent of investors and advisers are going to fail, because they insist on resurrecting the pre-GFC finance industry mantra that "the market always goes up in the long term".
It's a mantra that the 93 per cent of the working population who choose to make their superannuation contributions to their employer's default balanced fund have also, unwittingly, bought into as well.
They are all going to experience the big trend and in a UEFC world (US and European Financial Crisis - yes, they are still in a crisis), managed funds and long-term investment are a much bigger gamble than they were.
So my advice is to disregard the daily macro rubbish, dismiss your long-term "faith", dismiss your grand declarations about the future and just get on with making money in individual stocks when you can.
Get in when they're going up and get out when they're going down. It's a mistake to adopt long-term investment again just because the market's gone up 23 per cent. You have to do better than that.
Frequently Asked Questions about this Article…
The article warns that optimism about Australian equities is often based on past performance and marketing, not guarantees. It points out that markets can remain weak for decades (using Japan as an example) and says you shouldn’t assume a recent rally (Australia was up 23% in seven months) means long-term gains are guaranteed. The takeaway: don’t rely solely on a head‑in‑the‑sand long‑term strategy — be prepared to act when market conditions change.
The Japanese market shows extremes: it fell about 82% from 1989 to 2008 and remained about 70.8% down over 23 years, yet within that period there were eight bull markets averaging +61.6% and eight bear markets averaging −44.3%, each lasting more than a year. This demonstrates that even in long-term bear markets there are substantial, tradeable rallies and opportunities to make money if you time them.
According to the article, to capture 'trends within the trend' you’ll need to time the market — get in when stocks are rising and get out when they begin to fall. The author cautions that many investors and advisers (he suggests up to 90%) will struggle with timing because they cling to the mantra that markets always go up in the long term. The message: timing is difficult but necessary if you want to exploit short‑to‑medium term opportunities.
The article advises against complacency after a strong rally. Rather than reverting automatically to a long‑term faith-based approach, consider taking opportunities in individual stocks while remaining prepared to exit when momentum fades. In short: enjoy the rally, but don’t assume it removes risk or guarantees continued gains.
The article argues that in a world still affected by US and European financial issues ('UEFC'), managed funds and long‑term strategies can be a bigger gamble than before. It notes about 93% of the working population make super contributions to default balanced funds, meaning many people are exposed to the big market trend and its risks rather than actively managing timing or stock selection.
The article acknowledges real macro concerns — rampant money printing and ballooning US/European debt — but suggests those arguments aren’t the point for stock investors. The author’s view is that while macro risks exist, there is still money to be made in equities and investors shouldn’t be paralyzed by daily macro headlines; instead focus on actionable opportunities in individual stocks.
Using Japan as the example, the article highlights frequent and significant swings: eight bull markets averaging about +61.6% and eight bear markets averaging about −44.3% within the long-term downtrend. Each of those phases lasted on average more than a year, illustrating that substantial, tradeable moves occur even inside longer secular trends.
The core rule is straightforward and repeated in the article: 'Get in when they’re going up and get out when they’re going down.' Put another way — strike when stocks are hot and cut when they’re not. The author urges dismissing grand long‑term faith and daily macro noise, and instead taking opportunistic positions in individual stocks while managing the timing of entries and exits.
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