"Stocks have gone over 1,000 days without a 10% correction" the headlines tell us...
We are warned – almost daily – about how this is an amazing milestone for the stock market... and that stocks have to correct at some point.
We're warned that it has been three decades since something like this happened... and that the last streak ended in 1987, the same year of the last great crash on Wall Street.
Hearing those things, it's easy to believe that a crash in stocks is imminent...
Yes, all of those things are true... It is an amazing run, and stocks do have to correct... but none of those things are dependent on the other.
In short (and this is the big thing I want you to learn today):
There is no "life expectancy" of a bull market in stocks.
Like a human life, the lives of some bull markets in stocks are longer than others. But unlike a human life, there is no maximum number of years built into the DNA.
There is a "life cycle" of a bull market in stocks – a pattern from bottom to top, from birth to death. And there are markers we can see along the way to judge where we are in it. But importantly, there is no maximum number of days, or years. If you know this, and invest accordingly, you will have "one up" on everyone – including the pros...
I remember exactly how I learned this lesson...
In the early 1990s (over 20 years ago, wow), I read a great book on investing – called Trader Vic – Methods of a Wall Street Master by Victor Sperandeo. (It's a hokey title, but the book had a lot of good ideas.)
Trader Vic had a great track record. And a lot of his ideas in the book made great sense. I definitely implemented some of them back then, and I use some of them even today.
However, I learned that one idea in the book didn't work out...
Trader Vic believed in market "life expectancies." He wrote that: "market movements, like people, have statistically significant 'life expectancy' profiles."
I believed him. But then I watched, throughout the 1990s, as the bull market just kept going up, and up, and up. The 1990s were incredible, defying all odds, defying all life expectancies, and defying all historic measures of value.
In the 1990s, if you'd followed Trader Vic's market life expectancy, you would have missed one of the greatest booms in stock market history.
I do have a ton of respect for Trader Vic's books. But fortunately, I learned early enough to discard Vic's "life expectancy" thesis.
Instead, my idea is that there is definitely a life cycle to bull markets, but you can't put a number of days or years on it. It ends when it ends... It truly is over once all the markers have been hit.
So when I hear that the stock market has not had a 10% correction in over 1,000 days, I don't get worried. To me, it DOES NOT increase the odds of a correction tomorrow.
Think of it this way...
Let's say you flipped a coin 100 times – and the coin came up heads 100 times in a row.
Tell me, what are the odds that the next coin flip will be tails?
At some point, the coin HAS to come up tails – right?
Of course it does... at some point. But that doesn't change the odds of the next flip – the odds of the next flip are still 50/50.
It's not exactly the same in the markets... but it's not far off.
If you're a longtime reader of mine, you know that I think we're in about the "seventh-inning stretch" of this bull market. Judging by the markers, we're getting late in the game... but we don't know the date that the game will end.
Stocks have gone up for longer than 1,000 days... They've basically been going up since March of 2009 – more than five years.
That is an incredibly long run – in years. If "life expectancy in years" mattered, I'd be getting worried.
But I don't think life expectancy in years is what matters... What matters is where we are based on the usual markers in the life of a bull market. Based on those, we are closer to the end than the beginning... but there's still upside potential from here...
In the next few weeks and months, you will hear your friends and family (and your investment advisers) say that "stocks have been going up for years – they have to correct at some point."
I suggest you quietly nod your head in agreement... both of those points are correct. But know deep down inside that you are "one up" on them – you know that the first point doesn't cause the second point – that there is no life expectancy in years for a bull market...