It has been almost exactly eight years since the S&P 500 bottomed in March 2009. Since that time, the SPDR S&P 500 ETF Trust SPY is up 241 percent, and the average investor has made a killing. Lucky and skilled investors who have outperformed the market have done even better, many quadrupling their portfolios.
Fortunately, the stock market has performed so well in the past eight years that it has been fairly difficult to lose money. Even most investors that have significantly lagged the market have more than doubled their money in the past eight years, assuming their accounts are at least somewhat diversified.
But if you are feeling like a genius these days for buying stocks in 2009 and doubling or tripling your investment in the past eight years, billionaire hedge fund manager Seth Klarman has a warning for you: Don’t get too cocky.
A Word Of Warning
“The markets are often a tease, falsely reinforcing one’s confidence as prices rise and undermining it as they fall,” Klarman recently wrote in a letter to investors.
That single quote is a succinct summation of a stock market phenomenon known as the investor sentiment cycle. The gist of the cycle is that market tops typically occur at the times investors are feeling most confident and most sure of themselves.
In other words, if you think you’ve got this stock market thing figured out, watch out below.
One of the dangers of such an extended bull market is that there is an entire generation of new investors that have never experienced most of the sentiment cycle before and may be ill-equipped for the emotional journey.
“The key is to hold your emotions in check with reason, something few are able to do,” Klarman said.
Unfortunately, when investors are successful, they often get overconfident. This overconfidence leads to more risky investment decisions, often at the worst possible times.
There’s certainly nothing wrong with being confident in your investment acumen. However, all investors, but particularly younger and newer investors, should remember…
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