As the S&P 500 and Nasdaq seem set to continue to record new highs, some market analysts believe that the current raging US bull market may be in for a nasty correction. Others argue that it still has a way to go. Vuyo Nogantshi discusses why investors with a long-term outlook should maintain a consistent approach.
The longest bull market in modern history reached its 10-year mark earlier this year. It began during the 2008 global financial crisis, when the S&P 500 hit its lowest point on 9 March 2009. It has since reached almost 128 months, overtaking the previous bull market record, which ran from October 1990 until the end of the dot.com bubble in 2000.
Broadly speaking, a bull market refers to any market where prices are rising or are expected to rise for extended periods of time. They are usually characterised by investor optimism and confidence. In contrast, a “bear market” is characterised by falling prices and prevailing investor pessimism.
In fact, there are no single authoritative definitions of the “bull market” and “bear market” terms. The most conservative definitions speak to consistently rising or falling markets that do not suffer a sympathetic fall or rise, respectively. At the extreme, definitions anchor investors to hard figures, with the most common being a consistent 20% movement without an equivalent reversal.
The question on everyone’s mind is, “When will it end?” Stock markets rise and fall, and market corrections are inevitable, but it is nearly impossible to predict when they will occur. A market correction is defined as a decline in market prices of 10% or more, usually following a sustained rise. While this may be daunting for speculative traders with a short-term focus, as long-term investors, we welcome the price adjustment: A stock market correction provides a great opportunity to buy high-quality companies at attractive prices.
A sustainable approach
The single most important factor that determines your investment returns is the price you pay. Given that share prices are elevated during bull markets, we are most concerned about permanent loss of capital: the risk that a share ends up being worth less than what we paid for it. During times like this, what is important is that we apply a disciplined investment process and consider each holding on its merits, based on its underlying value, as we have always done in the past.
As contrarian investors, Allan Gray and our offshore partner, Orbis, remain acutely aware of market sentiment. When the markets reflect a considerable amount of fear (bear markets) or overwhelming greed (bull markets), we get to work: The resultant mispricing of assets provides us with the opportunity to add value for our clients over the long term when assets are priced very cheaply, and the opportunity to preserve client capital when asset prices are inflated.
In our view, many of the popular "growth" stocks driving the current US bull market are overpriced and, as a result, we do not hold them. This means that we are forced to look in the less popular sections of the market to find opportunities that offer real long-term value.
As analysts and strategists continue to speculate and weigh up a number of factors in an effort to predict when the current bull run might end, we remain committed to our long-term valuation-based approach: buying shares we think are undervalued and selling them when we think they have reached their intrinsic worth, regardless of popular opinion.